MOLSON COORS BEVERAGE CO - Annual Report: 2014 (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, 2014 | |
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 30, 2014, was $11,119,177,834 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 30, 2014, 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 6, 2015:
Class A Common Stock—2,559,794 shares | Class B Common Stock—162,861,262 shares | |
Exchangeable shares:
As of February 6, 2015, the following number of exchangeable shares was outstanding for Molson Coors Canada, Inc.:
Class A Exchangeable Shares—2,894,040 shares | Class B Exchangeable Shares—17,567,143 shares | |
The Class A exchangeable shares and Class B exchangeable shares are shares of common stock in Molson Coors Canada Inc., a wholly-owned subsidiary of the registrant. They are publicly traded on the Toronto Stock Exchange under the symbols TPX.A and TPX.B, respectively. These shares are intended to provide substantially the same economic and voting rights as the corresponding class of Molson Coors common stock. In addition to the registered Class A common stock and the Class B common stock, the registrant has also issued and outstanding one share each of a Special Class A voting stock and Special Class B voting stock. The Special Class A voting stock and the Special Class B voting stock provide the mechanism for holders of Class A exchangeable shares and Class B exchangeable shares to vote with the holders of the Class A common stock and the Class B common stock, respectively, on matters of the registrant. The holders of the Special Class A voting stock and Special Class B voting stock are entitled to one vote for each outstanding Class A exchangeable share and Class B exchangeable share, 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 Special Class A voting stock and Special Class B voting stock are subject to a voting trust arrangement. 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, but will only cast a number of votes equal to the number of Class A exchangeable shares and Class B exchangeable shares as to which it has received voting instructions from the owners of record of those Class A exchangeable shares and Class B exchangeable shares, other than the registrant or its subsidiaries, respectively, on the record date.
Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement for the registrant's 2015 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, 2014, 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 2015" 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, Republic of Ireland, Romania, Serbia, Slovakia and the United Kingdom ("U.K."); 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 core brands Carling, Coors Light, Molson Canadian and Staropramen, as well as craft and specialty beers such as Blue Moon, Creemore Springs, Cobra and Sharp's Doom Bar. For more than 350 combined years, we have been brewing high-quality, innovative products with the purpose of 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 the U.S., Canada 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.
Industry Overview
The brewing industry has significantly evolved over the years, becoming an increasingly global beer market. The industry was previously founded on local presence with modest international expansion achieved through export, license and partnership arrangements. More recently, it has become increasingly complex, as the consolidation of brewers has occurred globally, resulting in fewer major global market participants. In addition to the acquisitive element of this industry consolidation, the market continues to utilize export, license and partnership arrangements; however, these are often with the same global competitors that make up the majority of the market. This industry consolidation has resulted in a few large global brewers representing the majority of the worldwide beer market. At the same time, smaller local brewers within certain established markets are experiencing accelerated growth as consumers increasingly place value on locally-produced, regionally-sourced products. As the beer industry continues its evolution of consolidation and diversification of its products to meet consumer demand with broadening preferences, large global brewers are uniquely positioned to leverage the scale, depth of product portfolio and industry knowledge to continue to lead the market forward.
As part of our participation in these industry changes, we have expanded our operations globally and in emerging markets, including our acquisition (the "Acquisition") of StarBev Holdings S.a.r.l. ("StarBev") in 2012, representing our operations within Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia, collectively, our Central Europe business and included within our Europe segment, as well as within our MCI segment where we continually aim to grow our market share within certain emerging markets, such as Latin America and Asia.
We evaluate ourselves in relation to other global brewers using various metrics, including overall market capitalization, volume, net sales revenue, gross margins and net profits, as well as our position within each of our core markets, with the goal to be the first choice for our consumers and customers. To provide a perspective of the relative size of the major participants in the global brewing market, the market capitalizations of our primary global competitors, based on foreign exchange rates at December 31, 2014, were as follows:
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Market Capitalization | ||||
(In billions) | ||||
Anheuser-Busch InBev SA/NV ("ABI") | $ | 180.6 | ||
SABMiller plc ("SABMiller") | $ | 84.5 | ||
Heineken N.V. ("Heineken") | $ | 40.7 | ||
MCBC | $ | 14.2 | ||
Carlsberg Group ("Carlsberg") | $ | 12.1 | ||
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 core brands Carling, Coors Light, Molson Canadian, and Staropramen. We consider these our core global brands for which we continue to invest in and focus on growing globally. We believe our portfolio encompasses all segments of the beer industry with the purpose of delighting the world's beer drinkers, including premium and premium lights, economy, above premium and craft, as well as adjacencies such as ciders and other malt beverages.
Our core brands sold in Canada include Coors Light and Molson Canadian. We also sell Carling, Carling Black Label, Coors Altitude, Coors Banquet, Creemore Springs, the Granville Island brands, Keystone Light, Mad Jack, Molson Canadian 67, Molson Canadian Cider, Molson Dry, Molson Export, Pilsner, the Rickard's family of brands and a number of other regional brands. Under license from Heineken, we also brew or distribute Amstel Light, Heineken, Murphy's, Newcastle Brown Ale and Strongbow cider. In January 2015, we also began selling premium import brands owned by Heineken, including Desperados, Dos Equis, Moretti, Sol and Tecate. Additionally, we distribute Miller Chill and Miller Genuine Draft under license from SABMiller. During the fourth quarter of 2014, we entered into an agreement with Miller Brewing Company ("Miller"), a wholly owned subsidiary of SABMiller, for the accelerated termination of the Miller license agreement, effective March 2015. See Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes to the Consolidated Financial Statements ("Notes"). We also have contract brewing agreements to produce for the U.S. market Asahi Select and Asahi Super Dry for Asahi Breweries, Ltd. and Labatt Blue and Labatt Blue Light for North American Breweries, Inc.
MillerCoors sells a wide variety of brands throughout 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 U.S. and Puerto Rico. MillerCoors' core brands sold in the U.S. are Coors Light and Miller Lite. Including craft and import brands, some of which are marketed and sold through Tenth and Blake Beer Company ("Tenth and Blake"), MillerCoors' also sells Batch 19, Blue Moon brands, Coors Banquet, Coors Non-Alcoholic, Grolsch, Hamm's, Henry Weinhard's brands, Icehouse, Keystone, Leinenkugel's brands, Mickey's, Miller Fortune, Miller Genuine Draft, Miller High Life, Milwaukee's Best, Olde English 800, Peroni Nastro Azzurro, Pilsner Urquell, Sharp's non-alcoholic, Smith & Forge, St. Stefanus, Steel Reserve, Third Shift, Worthington's and hard cider brands from the Crispin Cider Company. MillerCoors also brews or distributes under license the George Killian's Irish Red and Redd's brands, as well as certain of the Foster's and Molson brands.
Our core brands sold in Europe include Carling and Staropramen. We also sell Apatinsko, Astika, Bergenbier, Blue Moon, Borsodi, Branik, Coors Light, Jelen, Kamenitza, Niksicko, Noroc, Ostravar, Ozujsko, Sharp's Doom Bar and Worthington's, as well as a number of smaller regional ale brands in the U.K., Republic of Ireland and Central Europe. The European business has licensing agreements with various other brewers through which it also brews or distributes Beck's, Belle-Vue Kriek brands, Hoegaarden, Leffe, Lowenbrau, Löwenweisse, Spaten and Stella Artois in certain Central European countries. Additionally, starting in January 2015, we now also distribute Corona Extra, Modelo Especial, Negra Modelo and Pacifico Clara throughout the Central European countries in which we operate. In the U.K., we also sell the Cobra brands through the Cobra Beer Partnership Ltd. joint venture and the Grolsch brands through a joint venture with Royal Grolsch N.V., and are the exclusive distributor for several brands which are sold under license, including 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.
Our core brands sold in our international markets as part of our MCI segment include Coors Light and Staropramen. Other brands sold in our international markets, including brands sold under export and license agreements, include Blue Moon, Carling, Cobra, Corona and Molson Canadian. We also market and sell brands unique to these international markets which include Coors, Coors 1873, Coors Extra, Coors Gold, Iceberg 9000, King Cobra and Zima.
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Our Segments
In 2014, we operated the following segments: Canada, the U.S., Europe and MCI. 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 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.
Canada Segment
We are Canada's second-largest brewer by volume and North America's oldest beer company. Our market share of the Canada beer market in 2014 was approximately 37%. 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 Canada core brands, primarily Coors Light and Molson Canadian, as well as other key owned brands, including Carling, Coors Banquet, Creemore Springs, Granville Island, Molson Dry, Molson Export, Pilsner and Rickard's and strategic distribution partnerships, including those with Heineken. In 2014, Coors Light had an approximate 13% market share and was the second largest selling beer brand in Canada, and Molson Canadian had an approximate 7% 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. BRI is currently owned by MCC, Labatt Breweries of Canada LP (a subsidiary of ABI) and Sleeman Breweries Ltd. (a subsidiary of Sapporo International), and BDL is jointly owned by MCC and Labatt Breweries of Canada LP.
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. In 2014, approximately 18% of our Canada segment 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.
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. These BRI retail outlets operate under The Beer Store name. 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.
In January 2015, BRI, with our endorsement, announced a proposed change in ownership structure allowing all other Ontario based brewers, regardless of size, the ability to participate in the ownership of BRI. As part of this proposed change, two new share classes will be created and the board of directors will be expanded to include representation for these new ownership classes. New owners will be subject to the same fee structure as the current owners, with the exception of smaller brewers, who will have discounted fees, as they will not be required to fund certain costs associated with capital investment in new stores or pension and benefits. Under the new ownership structure, BRI will continue to operate on a break-even basis, and all Ontario brewers will benefit from the low-cost and high efficiency nature of the system. Further, the new owners will have the ability to appoint a representative to the executive committee that will work with management on the day-to-day operations of the business.
Province of Québec
In Québec, the distribution and sale of beer is governed by the Quebec Alcohol Corporation ("SAQ"). 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.
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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 ABI, 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, from which we have a committed supply through 2016. Hops are purchased from a variety of global suppliers in the U.S., Europe, and New Zealand through contracts that vary in length based on market conditions and cover our supply requirements through at least 2015. Other starch brewing adjuncts are sourced from two main suppliers, both in North America. 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 used in our brewing process in the near term.
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 2016. We source lids and cans from two primary providers with contracts ending February 2016 and December 2016, respectively. We currently utilize a hedging program for aluminum requirements and related transportation and storage costs in Canada. The distribution systems in each province generally provide the collection network for returnable bottles and aluminum cans. The standard bottle for beer brewed in Canada is the 341 ml returnable bottle and represents the vast majority of our bottle sales. Bottle sales have declined as we have experienced a shift in consumers' preference toward aluminum cans. This standard returnable bottle requires significant investment behind our returnable bottle inventory and bottling equipment. Therefore, the trend away from returnable bottles could result in higher fixed cost deleverage related to these assets and an ultimate decreased need for these assets that support this packaging, which could adversely impact profitability. 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 under contracts ending between December 31, 2015, and December 31, 2016. We do not currently anticipate future difficulties in accessing any of our required packaging materials in the near term. The following table reflects the percentage of total sales volumes (excluding imports) for each of the last five years by type of packaging material.
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||
Aluminum cans | 49 | % | 46 | % | 42 | % | 39 | % | 34 | % | |||||
Bottles | 40 | % | 43 | % | 47 | % | 51 | % | 56 | % | |||||
Stainless steel kegs | 11 | % | 11 | % | 11 | % | 10 | % | 10 | % | |||||
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Contract Manufacturing
We have an agreement with North American Breweries, Inc. ("NAB") to brew, package and ship Labatt trademark brands to the U.S. market through 2020. 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
2014 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. In 2014, the Ontario and Québec markets accounted for approximately 60% of the total beer market in Canada.
There are three major beer price segments: above premium, which includes craft and 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 weak, with declines in five of the last six years. Aging population, a stalled economy and strong competition from other alcohol beverages 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 alcohol beverages as a component of the overall Canadian alcohol market over the last five years, for which data is currently available. We anticipate that 2014 data, when available, will reflect a continuation of the recent consumer trends.
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Beer | 48 | % | 49 | % | 50 | % | 51 | % | 51 | % | ||||
Other alcohol beverages | 52 | % | 51 | % | 50 | % | 49 | % | 49 | % | ||||
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 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 and ABI. The following table summarizes the estimated percentage share of the Canadian beer market represented by MCBC, ABI and all other brewers over the last five years. Note that the sum of the percentages below may not equal 100% due to rounding. Current year percentages reflect estimates based on market data currently available.
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
MCBC share(1) | 37 | % | 39 | % | 40 | % | 41 | % | 42 | % | ||||
ABI share(1) | 43 | % | 40 | % | 41 | % | 41 | % | 41 | % | ||||
Others' share | 21 | % | 20 | % | 19 | % | 18 | % | 17 | % | ||||
(1) | The decrease in MCBC share and increase in ABI share from 2013 to 2014 is primarily the result of ABI's acquisition of Grupo Modelo S.A.B. de C.V. ("Modelo") in 2013. Subsequent to the termination of Modelo Molson Imports, L.P. |
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("MMI"), our joint venture with Modelo in Canada, in the first quarter of 2014, the Modelo brands are now distributed by ABI 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, distribution and sale of beer. Effective August 1, 2014, an equalization and standardization of excise taxes between distribution channels was implemented in Quebec. This resulted in a 26% increase and corresponding 23% decrease in excise tax rates applicable to off-premise and on-premise sales, respectively. Furthermore, the negative impact of the 3% overall net increase in excise tax rates was accentuated by the fact that the majority of our beer volume sold in Quebec is consumed off-premise. Previously, effective November 21, 2012, increases of over 20% were implemented for both off-premise and on-premise excise tax rates in Québec. In addition, the federal government regulates the advertising, labeling, quality control, and international trade of beer, and also imposes commodity taxes on both domestically produced and imported beer. In 2014, our Canada segment excise taxes were approximately $71 per hectoliter sold on a reported basis. 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.
In April 2014, the Ontario Premier's Advisory Council on Government Assets began a review that included evaluating the BRI distribution model. The ultimate consequences to the current BRI distribution model are not yet determined but could have a significant financial impact to our Canadian business. Refer to Part I—Item 1A, Risk Factors for risks associated with the regulatory environment in Canada.
United States Segment
MillerCoors is the second largest brewer by volume in the U.S., selling approximately 27% of the total 2014 U.S. brewing industry shipments (excluding exports). 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. Both parties to the MillerCoors joint venture are currently 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 Company ("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 2014, approximately 17% of MillerCoors' beer volume was sold on-premise in bars and restaurants, and the other 83% 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 2014.
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 currently anticipate future difficulties in accessing water or agricultural products used in its brewing process in the near term.
Brewing and Packaging Facilities
MillerCoors operates nine breweries, two packaging facilities and one cidery, 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.
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Packaging Materials
Approximately 64% of U.S. products sold were packaged in aluminum cans or bottles in 2014. A portion of the aluminum containers 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, both of which will expire December 31, 2021. Approximately 27% of U.S. products sold in 2014 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 expires in 2015. MillerCoors and Owens entered into a new supply agreement effective January 1, 2015 for glass bottle requirements in excess of RMBC's production. The approximate remaining 9% of U.S. production volume sold in 2014 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. In recent years, we have experienced a slight shift in the allocation among different packaging types toward aluminum cans and bottles and away from glass bottles. In general, aluminum cans allow for lower packaging costs compared to other types of packaging materials. MillerCoors does not currently anticipate difficulties in accessing packaging products in the near term.
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 for SABMiller.
Seasonality of the Business
Total industry volume in the U.S. 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 the U.S. is seasonal, with approximately 38% of industry sales volume typically occurring during the warmer months from May through August.
Known Trends and Competitive Conditions
2014 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 the majority of the market in 2014. 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. marketplace. 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 approximately 1%. However, in 2013 the industry saw a decline of approximately 1% to 2%, and in 2014, the industry grew slightly, by less than 1%.
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, as well as wine, spirits and other alcohol beverages. While economic conditions have improved slightly in 2014, competition from outside of the beer category continues to be a challenge for the industry.
The following table summarizes the estimated percentage market share by volume of beer (including adjacencies, such as cider) and other alcohol beverages as a component of the overall U.S. alcohol market over the last five years, for which data is currently available. We anticipate that 2014 data, when available, will reflect a continuation of the recent consumer trends.
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Beer | 52 | % | 53 | % | 53 | % | 54 | % | 55 | % | ||||
Other alcohol beverages | 48 | % | 47 | % | 47 | % | 46 | % | 45 | % | ||||
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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 brands, but also competes with imported and craft beer brands. The following table summarizes the estimated percentage share of the U.S. beer market represented by MillerCoors, ABI and all other brewers over the last five years. Note that current year percentages reflect estimates based on market data currently available.
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
MillerCoors share | 27 | % | 28 | % | 29 | % | 29 | % | 30 | % | ||||
ABI share | 46 | % | 47 | % | 48 | % | 48 | % | 50 | % | ||||
Others' share | 27 | % | 25 | % | 23 | % | 23 | % | 20 | % | ||||
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 2014, excise taxes on malt beverages were approximately $16 per hectoliter sold on a reported basis. State excise taxes are levied in specific states at varying rates. Refer to Part I—Item 1A, Risk Factors for risks associated with the regulatory environment in the U.S.
Europe Segment
We are the second largest brewer by volume, on a combined basis, within the European countries in which we operate, with an approximate aggregate 20% market share (excluding factored products) in 2014. The majority of our European segment sales are in the U.K., Croatia and Czech Republic. Our portfolio includes beers that have the largest share in their respective countries, such as Carling in the U.K., Jelen in Serbia, Ozujsko in Croatia and Niksicko in Montenegro. We have beers that rank in the top three in market share in countries throughout the region, including Kamenitza in Bulgaria, Staropramen in Czech and Borsodi in Hungary. We also brew and distribute Beck's, Lowenbrau, Spaten and Stella Artois under license agreements with ABI companies, and beginning January 2015, we now also distribute certain of the Modelo brands throughout the Central European countries in which we operate. 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 Republic of Ireland and factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by us).
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. We have an agreement with Tradeteam Ltd. ("Tradeteam", a subsidiary of DHL) to provide the distribution of our products throughout the U.K. through 2023. It is also common in the U.K. for brewers to distribute beer, wine, spirits, and other products owned and produced by other companies, which we refer to as factored brands, to the on-premise channel (bars and restaurants). Approximately 18% of our Europe segment net sales in 2014 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.
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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 2014. 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 2014. 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 can be 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.
Manufacturing, Production and Packaging
Brewing Raw Materials
We use the highest quality water, barley, malt and hops to brew our products. During 2014, our malt requirements were sourced from both owned production and third party suppliers. We produced 38% of our total required malt from our malt-house in the U.K., using barley sourced through two suppliers with commitments until 2014 and 2016, respectively. In 2015, we entered into an agreement to sell our malting facility in the U.K. and, concurrent with the sale, entered into a long term contract with the purchaser of the facility to replace the malt that we previously produced. We have also entered into long term contracts with two suppliers for an additional 50% of our required malt which expire at the end of 2015 and 2020, respectively. Our remaining requirements are purchased on a spot basis from various maltsters in the region. Hops are purchased under various contracts with suppliers in Germany, the U.S. and the U.K., which cover our requirements 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 used in our brewing process in the near term.
Brewing and Packaging Facilities
We operate thirteen breweries in Europe, which brew and package brands sold in Europe. Following the termination of our distribution agreement with Heineken in the U.K., and upon completion of a strategic review of our European supply chain network, management has made a proposal to close our brewing facility in Alton, Hampshire, U.K. in 2015. See Item 2, "Properties" for additional information.
Packaging Materials
Approximately 30% of our Europe volumes sold in 2014 were packaged in bottles, with a significant majority in returnable bottles. 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 29% of volume sold in Europe in 2014. A limited number of steel kegs are purchased each year, and we are currently negotiating the agreement for our steel keg requirements for 2015. Cans represent approximately 23% of our Europe volumes sold in 2014. We have long term contracts with four providers for our required supply of cans. Approximately 18% of our Europe volume sold in 2014 consisted of products packaged in recyclable plastic containers for which we are currently negotiating agreements for our 2015 requirements with various manufacturers in the region. Crowns, labels and corrugate are purchased from sources unique
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to each category. The allocation amongst different packaging types did not significantly change over the past five years. 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 agreed to pay us an aggregate early termination payment of GBP 13.0 million, of which we received GBP 5.0 million in 2014 and will receive the remainder at the end of the transition period, concluding on April 30, 2015. We also renewed our existing agreement with Heineken, whereby they sell, market and distribute Coors Light in Republic of Ireland, to extend the contract through December 2019. In addition, we have a five year agreement to contract brew ales for Carlsberg through 2016.
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
2014 Europe Beer Industry Overview
We estimate that the Europe beer market declined by approximately 1% in 2014, primarily driven by declines in the overall alcohol market. Since 2010, the off-premise market share has increased in our European markets from 55% to nearly 60% of total volume, and the on-premise market share has declined from 45% to 40%. Europe beer industry retail shipments have declined by approximately 2% in 2013 and approximately 1% in each of 2012 and 2011. These market fluctuations are consistent with the fluctuations within the overall alcohol market in each of the respective years.
The following table summarizes the estimated percentage market share by volume of beer (including adjacencies, such as cider) and other alcohol 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 anticipate that 2014 data, when available, will reflect a continuation of the recent consumer trends.
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Beer | 35 | % | 35 | % | 35 | % | 35 | % | 36 | % | ||||
Other alcohol beverages | 65 | % | 65 | % | 65 | % | 65 | % | 64 | % | ||||
Our Competitive Position
Our beers compete not only with similar products from competitors, but also with other alcohol beverages, including wines, spirits, and ciders. We believe our brand portfolio gives us strong representation in all major beer categories.
In European countries where we operate, our primary competitors are Heineken, SABMiller, Carlsberg and ABI. The following table summarizes our estimated percentage share of the beer market within the European countries where we operate and our primary competitors over the last five years. Note that current year percentages reflect estimates based on market data currently available.
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
MCBC share | 20 | % | 20 | % | 20 | % | 20 | % | 21 | % | ||||
Primary competitors' share | 59 | % | 59 | % | 60 | % | 60 | % | 59 | % | ||||
Others' share | 21 | % | 21 | % | 20 | % | 20 | % | 20 | % | ||||
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 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,
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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 directives of the EU. 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. In 2014, the excise taxes for our Europe segment were approximately $56 per hectoliter on a reported basis. Refer to Part I—Item 1A, Risk Factors for risks associated with the regulatory environment in Europe.
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 and Europe segments. The focus of MCI includes Asia, continental Europe (excluding Central Europe, as it is a part of the Europe segment), Latin America (including South America), the Caribbean (excluding Puerto Rico, as it is a part of the U.S. segment) and Australia. The MCI portfolio of beers compete within the above-premium category in most of our markets. Our principal competitors include large global brewers, as well as local brewers. As MCI's objective is to grow and expand our business, we are developing scale to build market share in the countries where we operate. Many of the markets in which we operate are considered emerging beer markets, with other brewers controlling the majority of the market share. Our beers compete not only with similar products from competitors, but also with other alcohol beverages, including wines, spirits, and ciders, and thus our competitive position is affected by consumer preferences between and among these other categories.
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 Cobra, Iceberg 9000, King Cobra and Royal Brew in select Indian states. MC Cobra uses the highest quality ingredients to brew its products, which are sourced through various contracts with local suppliers. We do not foresee any significant risk of disruption in the supply of these raw materials or brewing inputs in the near term.
In Japan our focus is on the marketing and selling of the Blue Moon, Coors Light and Zima brands. We are also currently renegotiating our contract with ABI to continue to sell and distribute the 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 family of brands and Carling, which are produced under a contract brewing agreement in China. All brands are marketed and sold through independent wholesalers primarily in the on-premise channel.
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 Blue Moon, Carling, Cobra, Coors 1873, Coors Light and Staropramen.
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 Europe and Blue Moon and Coors in Australia.
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,
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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 2038 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 to sustainability, or Our Beer Print, 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. Since 2012 we have been listed on the Dow Jones Sustainability World Index, and were named Beverage Sector Leader in 2012 and 2013. Our approach to reducing Our Beer Print is outlined in our 2020 Sustainability Strategy outlined on our website at www.molsoncoors.com. Launched in 2013, our 2020 Sustainability Strategy integrates how we manage energy, greenhouse gas emissions, water and solid waste and sets out how we intend to meet our 2020 ambitions. The cornerstone of our 2020 Sustainability Strategy is a commitment to invest in waste water treatment and generate clean energy from this waste stream. These investments will alleviate the impact of our operations on municipal water treatment resources, reduce our reliance on fossil fuels and save greenhouse gas emissions.
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 2014, we have approximately 9,100 full-time employees within MCBC globally, including 2,450 within our Canada segment, 6,000 employees within our Europe segment, 450 employees within our MCI segment in various countries around the world, and 200 employees in our Corporate headquarters in Colorado. Additionally, MillerCoors has approximately 8,300 employees. There have been no significant changes in our number of employees since December 31, 2014.
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 Exchange Act. 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.
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Executive Officers
The following tables set forth certain information regarding our executive officers as of February 12, 2015:
Name | Age | Position | ||
Mark R. Hunter | 52 | President, Chief Executive Officer and a Director of MillerCoors LLC | ||
Krishnan Anand | 57 | President and Chief Executive Officer of Molson Coors International | ||
Peter H. Coors | 68 | Chairman of the Board of the Company, Executive Director of Coors Brewing Company and Chairman of the Board of MillerCoors LLC | ||
Stewart F. Glendinning | 49 | President and Chief Executive Officer of Molson Coors Canada | ||
Gavin D. Hattersley | 52 | Chief Financial Officer and a Director of MillerCoors LLC | ||
Simon J. Cox | 47 | President and Chief Executive Officer of Molson Coors Europe | ||
Celso L. White | 53 | Chief Supply Chain Officer and a Director of MillerCoors LLC | ||
Samuel D. Walker | 56 | 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
The global beer industry is constantly evolving, and our position within the global beer industry and our markets in which we operate may fundamentally change. If we do not successfully transform along with the evolving industry and market dynamics, then the result could have a material adverse effect on our business and financial results. The brewing industry has significantly evolved over the years becoming an increasingly global beer market. For many years, the industry operated primarily on local presence with modest international expansion achieved through export, license and partnership arrangements, whereas it has now become increasingly complex as the consolidation of brewers has occurred globally resulting in fewer major global market participants. At the same time, smaller local brewers within certain geographies are seeing accelerated growth as consumers increasingly place value on locally-produced, regionally-sourced products. As a result of the increased global consolidation of brewers and the dynamic of an expanding new segment within the industry with new market entrants, the markets in which we operate, particularly the more mature markets, may evolve at a disadvantage to our current market position and local governments may intervene, which may fundamentally accelerate transformational changes to such markets. For example, U.S. and Canada beer markets have long consisted of a select number of significant market participants with government-regulated routes to market. However, recent evolution in these markets and emerging changes to consumer preferences have introduced a significant expansion of market entrants and resulted in increased consumer choice and market competition, as well as increased government scrutiny. Specifically, in Canada changes to the existing historical framework of regulations, distribution models, and packaging requirements, such as government-owned retail outlets and industry standard returnable bottles may be disadvantageous to us. Currently, in Ontario and other provinces, provincial governments are reviewing this historical foundation as a result of this market evolution and increased demand by some for government intervention to enhance competition and choice. As further described below, in addition to these risks related to growing competition and market evolution, the existing Ontario distribution models may be changed in ways that are unfavorable to us and the industry standard returnable bottle agreement may change in ways that adversely impact our operating model across Canada. If we are unsuccessful in evolving with, and navigating through, the changes to the markets in which we operate, the above risk could result in a material adverse effect on our business and financial results.
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 reduce our ability to promote our brands in the market in a manner that enhances rather than diminishes their value, as well as reducing
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our ability to manage our pricing effectively. 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 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. The above risk, if realized, could result in a material adverse effect on our business and financial results.
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 Coors Light and Molson Canadian brands in Canada, Coors Light and Miller Lite brands in the U.S., and Carling, Jelen, Ozujsko and Staropramen brands in Europe represented half of each respective segment's sales volumes in 2014. 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 some of our major markets, specifically Canada and the U.S., 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 beverage 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 or beer could result in a material adverse effect 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 effect 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 portfolio consists of premium and above premium brands. Difficult macroeconomic conditions in our markets, such as decreases 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. For example, during the second quarter of 2014, the Balkans region experienced significant flooding which further exacerbated the existing economic pressures in the area, resulting in an increased consumer trend toward value brands within the impacted markets. This trend, along with other contributing factors, led to a decrease in sales volumes in the region, as well as impairments of our Jelen brand in Serbia and Ozujsko brand in Croatia, which were recorded in the third quarter of 2014. A continuation of this trend or further deterioration of the current economic conditions could result in a material adverse effect on our business and financial results.
We may incur impairments of the carrying value of our goodwill and other intangible assets. In connection with various business combinations, we have historically 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 effect on our results of operations. For example, the results of our initial 2014 indefinite-lived intangible asset testing performed as of July 1, 2014, indicated that the fair value of our Jelen and Ozujsko indefinite-lived brand intangible assets within our Europe segment were below their respective carrying values. As a result, we recorded an aggregate impairment charge of $360.0 million recorded within special items in our consolidated statements of operations during the third quarter of 2014.
Our most recent impairment analysis, conducted as of October 1, 2014, the first day of our fiscal fourth quarter, indicated that the fair value of our Europe and Canada reporting units were at risk of failing step one of the goodwill impairment test. The fair value of the Europe and Canada reporting units were estimated at approximately 14% and 11% in excess of their carrying values, respectively. Additionally, the fair value of the Jelen, Ozujsko and Niksicko indefinite-lived brands in Europe, and the Molson core brands in Canada, were also at risk of failing the quantitative analysis of the indefinite-lived intangible asset impairment test as of October 1, 2014. The Europe and Canada reporting units, and the Jelen, Ozujsko and Niksicko 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. Any future impairment of the Europe or Canada reporting units or Jelen, Ozujsko, Niksicko, Molson or other brands, or reclassification of indefinite-lived brands to definite-lived, may result in material charges that could have a material adverse effect on our business and financial results. Additionally, the testing of our goodwill for impairment is predicated upon our determination of our reporting units. Any change to the conclusion of our reporting units or the
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aggregation of components within our reporting units could result in a different outcome to our annual impairment test. See Part II—Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Estimates and Part II—Item 8 Financial Statements and Supplementary Data, Note 12, "Goodwill and Intangible Assets" of the Notes for additional information related to the results of our annual impairment testing.
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 venture, licensing, distribution, contract brewing or other similar 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, during 2014 we entered into an agreement with Miller Brewing Company (“Miller”) to terminate the license agreement between Miller and MCC, which, when consummated in 2015, will have an adverse effect on our Canadian volumes. Additionally, subsequent to ABI's acquisition of Grupo Modelo in 2013, 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 resulted in an adverse impact on our 2014 Canadian volumes upon final termination in the first quarter of 2014.
Changes in various supply chain standards or agreements could have a material adverse effect 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 or material terms within these agreements could have a material adverse effect on our business and financial results.
We rely on a small number of suppliers to obtain the packaging materials 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 materials including aluminum cans and bottles, glass bottles and paperboard from a small number of suppliers. Consolidation of 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.
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. 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, we terminated our MMI joint venture that imported, distributed and marketed the Modelo beer brand portfolio across all Canadian provinces and territories, which, since termination in the first quarter of 2014, has had an adverse effect on our Canadian volumes and financial results. The above risk, if realized, could result in a material adverse effect on our business and financial results.
Our operations in developing and emerging markets expose us to additional risks which could harm our business and financial results. We expect our operations in developing and emerging markets 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 effect 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.
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Changes to the regulation of the distribution systems for our products could adversely affect 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, consisting of required separation of manufacturers, distributors and retailers, is increasingly subject to 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 effect on MillerCoors and, consequently, on us. 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 and BDL, to distribute our products via retail outlets that are mandated and regulated by provincial government regulators. BRI owns and operates commercial retail outlets, known as The Beer Store, in Ontario, and BDL facilitates the distribution of our products in the Western provinces. Recent review of government assets in Ontario has included an evaluation of the BRI distribution model, the results of which we are actively negotiating with the Ontario government. We cannot predict what, if any, changes may result from this review and what the impact may be on us; however, changes to the BRI distribution model could have a material adverse effect on BRI. See additional risks specific to BRI under the "Risks Specific to the Canada Segment" heading below. If provincial regulation should change, the costs to adjust our distribution methods could have a material adverse effect on 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 jurisdictions 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 a regulatory assessment received in Europe in the fourth quarter of 2014 related to the interpretation of the application of tax on the production and sale of our products. Failure to comply with existing laws and regulations or changes in these laws, regulations, or interpretations thereof, 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 adding new tax laws, the interpretation of, and potential future developments in, complex domestic and international tax laws and 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 and coordinated on a global basis, seeking to impose laws or 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 of jurisdictions in which we do or plan to do business, they could have a material adverse effect 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, Euro, British Pound, 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 jurisdictions 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, which may affect our operations, 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 affected. Additionally, the recent strengthening of the USD against the Canadian dollar, European currencies and various other global currencies, if continued, would adversely impact our USD reported results due to the impact on foreign currency translation.
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
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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 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.
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 global weather patterns 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. 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. The above risk, if realized, could result in a material adverse effect on our business and financial results.
Loss or closure of a major brewery or other key facility, due to unforeseen or catastrophic events or otherwise, could have a material adverse effect 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 significant 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 our brands if production capacity is limited. Further, significant excess capacity at any of our breweries as a result of increased efficiencies in our supply chain process or continued volume declines, could result in under-utilization of our assets, which could lead to excess overhead expenses or additional costs incurred associated with the closure of one or more of our facilities. For example, as part of a strategic review of our European supply chain network and following receipt of notification of the termination of our distribution agreement with Heineken in the U.K., management made a proposal to close our brewing facility in Alton, Hampshire, U.K. in 2015, in connection with which we incurred costs in the fourth quarter of 2014 and for which we may incur additional costs during the first half of 2015.
Failure to successfully identify, complete or integrate attractive acquisitions and joint ventures into our existing operations could have an adverse effect 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 risks 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 venture partners' 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.
Poor investment performance of pension plan holdings and other factors impacting pension plan costs could unfavorably affect 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
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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 (or the timing of such contributions) could have a material adverse effect on our cash flows, credit rating and cost of borrowing, financial position and/or results of operations. For example, following the completion of the triennial review of the U.K. pension plan with the plan's trustees in 2014, we agreed to make a GBP 150 million contribution to our U.K. pension plan in 2015, which we paid in January 2015, based on the underfunded status of the plan and the evaluation of the plan's performance and long-term obligations.
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 effect on our business 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.
Due to a high concentration of workers represented by unions or trade councils in Canada, Europe, and at MillerCoors in the U.S., we could be significantly affected by labor strikes, work stoppages or other employee-related issues. Approximately 65%, 36% and 39% of our Canadian, MillerCoors and European workforces, respectively, are represented by trade unions. 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.
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.
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. Additionally, we rely on internal networks and information systems and other technology, including the internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing and collection of payments. We use information systems for certain human resource activities and to process our employee benefits, as well as to process financial information for internal and external reporting purposes and to comply with various reporting, legal and tax requirements. 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. As information systems are critical to many of our operating activities, our business may be impacted by system shutdowns, service disruptions or security breaches. Additionally, if one of our 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. Further, our internal and outsourced systems may also be the target of a breach to our security, which, if successful, could expose us to the loss of key business, employee, customer or vendor information and disruption of our operations. If our information systems suffer severe damage, disruption or shutdown and our remediation plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results and
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we may lose revenue and profits as a result of our inability to timely manufacture, distribute, invoice and collect payments from our customers. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations, damage our reputation and credibility. In addition, we may suffer financial and reputational damage because of lost or misappropriated confidential information and may become subject to legal action and increased regulatory oversight. We could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.
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 90% of our Class A common stock and Class A exchangeable shares, have a voting trust agreement 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 trust against the matter. There is no other mechanism in the voting trust agreement 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 effect on Class B stockholders. See Part II—Item 8 Financial Statements and Supplementary Data, Note 9, "Stockholders' Equity" of the Notes for additional information regarding voting rights of Class A and Class B stockholders.
Risks Specific to the Canada Segment
Government mandated changes to the retail distribution model resulting from new regulations may have a material adverse effect on our Canada business. Beer sales are highly regulated by the Canadian government. For example, in Ontario, off-premise beer may only be purchased at retail outlets operated by BRI, government-regulated retail outlets operated by the Liquor Control Board of Ontario ("LCBO"), or approved agents of the LCBO. In April 2014, the Ontario Premier's Advisory Council on Government Assets (the "Council") began a review that included evaluating the BRI distribution model. The results of this review and related proposals are currently under active discussions with the Council, and the ultimate consequences related to this negotiation are unknown at this time. For example, the government could introduce a material operating fee, in the form of a mandated specific tax or other assessment, to allow BRI the right to continue to distribute in Ontario. It could also introduce incremental packaging options at the LCBO and agents of the LCBO, or otherwise mandate changes to the current retail distribution model, which could result in decreased off-premise sales volumes through BRI and negatively impact our position in the market. Additionally, as a result of the above review, certain other legal matters could arise that could have a negative impact on our business, such as the litigation related to our ownership of BRI discussed in Part I—Item 3. Legal Proceedings. The above risk, if realized, could result in a material adverse effect on our business and financial results.
We may experience adverse effects on 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 and the implementation of equalization and standardization of excise tax regulations 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.
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 approximately 40% 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
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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. For example, the loss of the services and expertise of any key MillerCoors employee could harm our business. 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. Certain rights of first refusal apply to any assignment of the joint venture interests. Any transfer of ownership interest could have a significant effect 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 many of 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
Economic trends and intense competition in European markets could unfavorably affect our profitability. Our European businesses have been, and may continue to be, adversely affected by conditions in the global financial markets and general economic and political conditions, as well as a continued weakening of their respective currencies versus the U.S. dollar. As a result of our annual impairment testing, we determined that the fair value of our Jelen and Ozujsko indefinite-lived brand intangible assets were below their respective carrying values as of July 1, 2014. As a result, we recorded an impairment charge in the third quarter of 2014. The decline in fair value of these brands was due, in part, to the continued weakening of the macroeconomic environment in certain European markets, which was further exacerbated by significant flooding that occurred in the Balkans region during the second quarter of 2014. This also drove an acceleration of the trend toward value brands in certain markets where our primary brands are considered premium or above-premium. Our impairment testing also indicated risk of additional future impairments of Jelen, Ozujsko and Niksicko 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 affect our profitability.
In the event that a significant pub chain declared bankruptcy, or experience similar financial difficulties, our business and financial results could be materially adversely affected. 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 affected.
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, on our ability to create effective product distribution networks and consumer brand awareness in new markets and in many cases our ability to find appropriate local partners. Due to product price, local competition from competitors that are larger and have more resources than we do and cultural differences, or absence of effective routes to market, 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.
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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 February 12, 2015, 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)(5) | 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.(1) | Brewing and packaging | |||
Zagreb, Croatia | Brewing and packaging | |||
Malting/grain silos | Burton-on-Trent, Staffordshire, U.K.(5) | Malting facility | ||
Distribution warehouses | Europe(6) | Distribution centers | ||
MCI Segment | ||||
Brewery/packaging plants | Patna, India | Brewing and packaging | ||
(1) | Montréal and Toronto breweries collectively account for approximately 77% of our Canada production. The Burton-on-Trent, Alton, Apatin, Prague, Ploiesti and Tadcaster breweries collectively account for approximately 76% 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 seven warehouses throughout Canada, excluding the Québec Province. |
(5) | As part of a strategic review of our European supply chain network and following the notice of termination of our distribution agreement with Heineken in the U.K., management has made a proposal to close our brewing facility in |
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Alton, Hampshire, U.K. during the first half of 2015. In January, we also entered into an agreement to sell our malting facility in the U.K. during 2015 as a result of this strategic review.
(6) | We own 16 distribution centers, lease 16 additional distribution centers, own four warehouses and lease four additional warehouses throughout Europe. |
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 2014, our operating facilities were not capacity constrained.
ITEM 3. LEGAL PROCEEDINGS
Litigation and other disputes
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. We subsequently filed a lawsuit in Ontario, Canada (Molson Canada 2005 v. Miller Brewing Company, Sup. Ct. of Justice-Ontario, CV-12-470589) and on June 20, 2013, were granted an injunction preventing Miller's termination of the License Agreement, pending a trial on the merits. 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. Based on the best information available at the time, these developments resulted in a non-cash impairment charge of $17.9 million recorded as a special item within our consolidated statement of operations for the year ended December 31, 2013. On October 9, 2014, we executed a settlement agreement with Miller. Pursuant to the terms of the settlement, we will continue to operate under the License Agreement until March 31, 2015, at which time all of our operations with regards to the Miller brands in Canada will terminate. We received half of the mutually agreed upon settlement payment following the execution of the settlement and will receive the remainder upon transition at the end of the first quarter of 2015. Order of official dismissal of the lawsuit was granted by the court on November 24, 2014.
In the third quarter of 2014, we updated our assessment of the associated definite-lived intangible asset for impairment. The analysis, primarily factoring in the settlement payments, resulted in a valuation of $18.8 million for the definite-lived intangible asset, resulting in a non-cash impairment charge of $8.9 million recorded as a special item within our consolidated statement of operations for the year ended December 31, 2014. The carrying value as of December 31, 2014, was $9.0 million and is indicative of the remaining settlement amount plus the future cash flows expected to be generated under the License Agreement through March 31, 2015. We recognized net sales related to the License Agreement of $79.5 million, $92.3 million and $98.0 million for 2014, 2013 and 2012, respectively. See Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes for additional information.
On December 12, 2014, a notice of action captioned David Hughes and 631992 Ontario Inc. v. Liquor Control Board of Ontario, Brewers Retail Inc., Labatt Breweries of Canada LP, Molson Coors Canada and Sleeman Breweries Ltd. No. CV-14-518059-00CP was filed in Ontario, Canada. Brewers' Retail Inc. ("BRI") and its owners, including Molson Coors Canada, as well as the Liquor Control Board of Ontario ("LCBO") are named as defendants in the action. The plaintiffs allege that The Beer Store (retail outlets owned and operated by BRI) and LCBO improperly entered into an agreement to fix prices and market allocation within the Ontario beer market to the detriment of licensees and consumers. The plaintiffs seek to have the claim certified as a class action on behalf of all Ontario beer consumers and licensees and, among other things, damages in the amount of Canadian Dollar ("CAD") 1.4 billion. Although we are at an early stage of the proceedings, we note that The Beer Store operates according to the rules established by the Government of Ontario for regulation, sale and distribution of beer in the province. Additionally, prices at The Beer Store are independently set by each brewer and are approved by the LCBO on a weekly basis. Accordingly, we intend to vigorously assert and defend our rights in this lawsuit. See 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 6, 2015, is as follows:
Title of class | Number of record security holders | |
Class A common stock, $0.01 par value | 26 | |
Class B common stock, $0.01 par value | 2,912 | |
Class A exchangeable shares | 243 | |
Class B exchangeable shares | 2,550 | |
The following table sets forth the high and low sales prices per share of our Class A common stock for each quarter of 2014 and 2013 as reported by the New York Stock Exchange, as well as dividends paid in such quarter.
High | Low | Dividends | ||||||||||
2014 | ||||||||||||
First quarter | $ | 58.25 | $ | 51.64 | $ | 0.37 | ||||||
Second quarter | $ | 75.32 | $ | 57.68 | $ | 0.37 | ||||||
Third quarter | $ | 77.16 | $ | 67.69 | $ | 0.37 | ||||||
Fourth quarter | $ | 102.40 | $ | 68.56 | $ | 0.37 | ||||||
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 | ||||||
The following table sets forth the high and low sales prices per share of our Class B common stock for each quarter of 2014 and 2013 as reported by the New York Stock Exchange, as well as dividends paid in such quarter.
High | Low | Dividends | ||||||||||
2014 | ||||||||||||
First quarter | $ | 59.15 | $ | 50.95 | $ | 0.37 | ||||||
Second quarter | $ | 75.54 | $ | 56.60 | $ | 0.37 | ||||||
Third quarter | $ | 77.68 | $ | 66.95 | $ | 0.37 | ||||||
Fourth quarter | $ | 77.93 | $ | 66.46 | $ | 0.37 | ||||||
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 | ||||||
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The following table sets forth the high and low sales prices per share of our Class A exchangeable shares for each quarter of 2014 and 2013 as reported by the Toronto Stock Exchange, as well as dividends paid in such quarter.
High | Low | Dividends | ||||||||||
2014 | ||||||||||||
First quarter | CAD | 64.05 | CAD | 60.99 | $ | 0.37 | ||||||
Second quarter | CAD | 82.11 | CAD | 66.00 | $ | 0.37 | ||||||
Third quarter | CAD | 86.00 | CAD | 75.02 | $ | 0.37 | ||||||
Fourth quarter | CAD | 88.88 | CAD | 81.00 | $ | 0.37 | ||||||
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 | ||||||
The following table sets forth the high and low sales prices per share of our Class B exchangeable shares for each quarter of 2014 and 2013 as reported by the Toronto Stock Exchange, as well as dividends paid in such quarter.
High | Low | Dividends | ||||||||||
2014 | ||||||||||||
First quarter | CAD | 66.00 | CAD | 56.50 | $ | 0.37 | ||||||
Second quarter | CAD | 82.01 | CAD | 62.10 | $ | 0.37 | ||||||
Third quarter | CAD | 87.00 | CAD | 75.76 | $ | 0.37 | ||||||
Fourth quarter | CAD | 90.48 | CAD | 77.00 | $ | 0.37 | ||||||
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 | ||||||
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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, 2009 (the last trading day of our 2009 fiscal year) in our Class B common stock, the S&P 500 and the Peer Group, and assumes reinvestment of all dividends.
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||
Molson Coors | $ | 100.00 | $ | 116.94 | $ | 102.92 | $ | 104.09 | $ | 137.79 | $ | 186.98 | ||||||||||||
S&P 500 | 100.00 | $ | 113.84 | $ | 116.35 | $ | 132.72 | $ | 171.35 | $ | 194.79 | |||||||||||||
Peer Group(1) | 100.00 | $ | 116.88 | $ | 120.54 | $ | 163.34 | $ | 188.11 | $ | 225.52 | |||||||||||||
(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. |
Dividends
On February 10, 2015, we declared an increased regular quarterly dividend of $0.41 per share, payable March 16, 2015, to Class A and Class B shareholders of record on February 27, 2015. This dividend represents an 11% increase from the most recent quarter’s dividend of $0.37 per share. In addition, Molson Coors Canada Inc. (TSX: TPX.B, TPX.A), declared a quarterly dividend of the Canadian dollar equivalent of $0.41 per share using the February 10, 2015 noon spot exchange rate as reported by the Bank of Canada, payable March 16, 2015, to Class A exchangeable and Class B exchangeable shareholders of record on February 27, 2015.
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Issuer Purchases of Equity Securities
On February 10, 2015, we announced that our Board of Directors approved and authorized a new program to repurchase up to $1.0 billion of our Class A and Class B common stock. The program has an expected term of four years from the date of our announcement and we plan to repurchase our stock, principally in the open market or through 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. Concurrent with the announcement of this new program, we terminated our previously existing program that was announced in 2011 for the repurchase up to $1.2 billion of our Class A and Class B common stock. We did not make any share repurchases under the previously existing program during the three months ended December 31, 2014.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes selected financial information for the five years ended December 31, 2014. For further information, refer to our consolidated financial statements and notes thereto presented under Part II—Item 8 Financial Statements and Supplementary Data.
2014 | 2013(1) | 2012(1)(2) | 2011(1) | 2010(1)(3) | ||||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||
Consolidated Statements of Operations: | ||||||||||||||||||||
Net sales | $ | 4,146.3 | $ | 4,206.1 | $ | 3,916.5 | $ | 3,515.7 | $ | 3,254.4 | ||||||||||
Net income from continuing operations attributable to MCBC | $ | 513.5 | $ | 565.3 | $ | 441.5 | $ | 674.0 | $ | 634.4 | ||||||||||
Net income from continuing operations attributable to MCBC per share: | ||||||||||||||||||||
Basic | $ | 2.78 | $ | 3.09 | $ | 2.44 | $ | 3.65 | $ | 3.41 | ||||||||||
Diluted | $ | 2.76 | $ | 3.07 | $ | 2.43 | $ | 3.62 | $ | 3.39 | ||||||||||
Consolidated Balance Sheets: | ||||||||||||||||||||
Total assets | $ | 13,996.3 | $ | 15,580.1 | $ | 16,212.2 | $ | 12,423.8 | $ | 12,697.6 | ||||||||||
Current portion of long-term debt and short-term borrowings | $ | 849.4 | $ | 586.9 | $ | 1,245.6 | $ | 46.9 | $ | 1.1 | ||||||||||
Long-term debt | $ | 2,337.1 | $ | 3,213.0 | $ | 3,422.5 | $ | 1,914.9 | $ | 1,959.6 | ||||||||||
Other information: | ||||||||||||||||||||
Dividends per share of common stock | $ | 1.48 | $ | 1.28 | $ | 1.28 | $ | 1.24 | $ | 1.08 | ||||||||||
(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 end 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 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. |
(3) | During the second quarter of 2014, we identified that we had incorrectly omitted the recognition of a liability for specific uncertain tax positions related to fiscal year 2010 that resulted in an immaterial misstatement of income tax expense within the consolidated statement of operations for the year ended December 25, 2010, as well as the liability for unrecognized tax benefits and retained earnings within the consolidated balance sheets at December 31, 2013, December 29, 2012, December 31, 2011, and December 25, 2010. We determined the impact of the correction of this error to be too significant to record within our second quarter 2014 results and, therefore, revised our historical statement of operations and balance sheets accordingly. To correct for this error, we have revised the impacted line items reported above, as well as the unrecognized tax benefits and retained earnings in the consolidated balance sheet as of December 31, 2013. See Part II—Item 8 Financial Statements and Supplementary Data, Note 7, "Income Tax" of the Notes to the Consolidated Financial Statements ("Notes") for additional information. |
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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.
Our Fiscal Year
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 end 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 reflect the three month periods ending March 31, June 30, September 30 and December 31. This change aligned our fiscal year and interim reporting periods with our Central Europe business and MillerCoors, which were already following a monthly fiscal reporting calendar. Unless otherwise indicated, (a) all $ amounts are in U.S. Dollars ("USD"), (b) comparisons are to comparable prior periods, and (c) 2014 refers to the 12 months ended December 31, 2014, 2013 refers to the period from December 30, 2012 through December 31, 2013, and 2012 refers to the 52 weeks ended on December 29, 2012. The impact of the three additional days in fiscal year 2013 is immaterial to the consolidated financial statements.
Use of Non-GAAP Measures
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; in communications with the board of directors, stockholders, analysts and investors concerning our financial performance; as useful comparisons to the performance of our competitors; and as metrics of certain management incentive compensation calculations. 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, 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 measure and have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure. These adjustments consist of special items from our U.S. GAAP financial statements (see Part II-Item 8 Financial Statements and Supplementary Data, Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements ("Notes") for additional disclosure) as well as other non-core items, such as acquisition and integration related costs, unrealized mark-to-market gains and losses, and gains and losses on sales of non-operating assets, included in our U.S. GAAP results that warrant adjustment to arrive at non-GAAP results. We consider these items to be necessary adjustments for purposes of evaluating our ongoing business performance and are often considered non-recurring. Such adjustments are subjective and involve significant management judgment.
In addition to the non-GAAP measures noted above, we have certain operational measures, such as sales-to-wholesalers (“STWs”) and sales-to-retailers (“STRs”), which we believe are useful metrics to management and investors in evaluating our operations. STW is a metric that we use in our U.S. business to reflect the sales from our operations to our direct customers, generally wholesalers. We believe 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. We believe 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 core brands Carling, Coors Light, Molson Canadian and Staropramen, as well as craft and specialty beers such as Blue Moon, Cobra, Creemore Springs and Doom Bar. For more than 350 combined years, we have been brewing high-quality, innovative products
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with the purpose of delighting the world's beer drinkers and goal to be the first choice for our consumers and customers. Our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
In 2014, our net income from continuing operations attributable to MCBC declined in 2014 compared to 2013, however, we grew underlying after-tax earnings, free cash flow and EBITDA, and exceeded our targets for cost savings, cash generation and significantly reduced our outstanding debt. Weak consumer demand continued across our largest markets, but we continued to focus on building a stronger brand portfolio, delivering value-added innovation, strengthening our core brand positions and increasing our share in the above-premium segment. We also continued to improve our sales execution and revenue management capabilities, increase the efficiency of our operations, implement common systems and focus on generating higher returns for our invested capital, managing our working capital and delivering a greater return on investment for our shareholders. Excluding the impact of foreign currency changes and the loss of the Modelo brands in Canada following the termination of our Molson Modelo Inc. ("MMI") joint venture, all of our segments achieved improved underlying profit performance in 2014 versus 2013. We grew our global above-premium volume, net pricing and sales mix, and maintained market share in Europe despite a poor economy and floods in some of our highest-share markets. Our craft portfolio drove growth from Doom Bar in the U.K., Creemore Springs in Canada and Blue Moon in the U.S., U.K. and our international markets. Our emerging cider portfolio delivered strong growth, led by Molson Canadian Cider and Strongbow in Canada, Smith & Forge Hard Cider in the U.S. and Carling British Cider in Europe. Volume challenges included Coors Light performance in Canada and the U.S., however, Coors Light worldwide volume grew nearly 2% on the strength of its performance in Europe and MCI.
2014 Financial Highlights:
• | Net income from continuing operations attributable to MCBC of $513.5 million, or $2.76 per diluted share, decreased 9.2% from a year ago, primarily due to a $124.4 million increase in net special charges versus the prior year, driven by increased impairments of intangible assets in 2014, partially offset by termination fee income associated with our MMI joint venture in Canada. Additionally, underlying after-tax income of $768.5 million, or $4.13 per diluted share, increased 5.7% and underlying EBITDA increased 0.1% compared to 2013, primarily due to an increase in underlying income in Europe and the U.S., partially offset by lower underlying income in Canada. Our underlying income excludes special and other non-core gains, losses and expenses that net to a $317.4 million pretax charge, as explained below. |
• | Worldwide beer volume for MCBC in 2014 decreased 1.3% compared to 2013, primarily due to lower volumes in the U.S. and Canada, partially offset by increased volumes from MCI. Additionally, consolidated net sales decreased 1.4% compared to 2013, driven by negative impacts of changes in foreign currency exchange rates and lower volumes in Canada, partially offset by positive sales mix in Europe. |
• | We generated cash flow from operating activities of $1,272.6 million, representing an 8.9% increase from $1,168.2 million in 2013 and a 29.4% increase from $983.7 million in 2012. Underlying free cash flow in 2014 was $956.7 million, compared to $892.0 million in 2013, representing an increase of 7.3%. These increases in operating cash flow and underlying free cash flow are driven by increased distributions from our investment in MillerCoors, as well as lower cash paid for pension contributions, capital expenditures, interest and taxes, along with higher underlying income, after considering non-cash impairments and other non-cash add-backs. These increases were partially offset by a decreased benefit from changes in net working capital. |
• | We decreased our total outstanding debt balances by $613.4 million during the year, primarily due to the repayment of our outstanding commercial paper borrowings and borrowings on our Euro credit facility, as well as the final repayment of the amounts initially withheld from the repayment of the €500 million convertible note, partially offset by increased balances on our overdraft facility. Additionally, the net underfunded position of our pension and other postretirement benefit plans, excluding those of MillerCoors and other equity method investments, increased by $91.1 million, primarily driven by the decrease in the weighted-average discount rates used, as well as decreased employer contributions and updates to published mortality tables. This increase was partially offset by changes in foreign exchange rates and the performance of our plan assets exceeding the expected return for our funded plans. We also repaid our remaining outstanding cross currency swaps for approximately $65.2 million. |
• | Regional financial highlights: |
• | In our Canada segment, we drove positive pricing and sales mix, achieved significant cost savings, and invested in improving the efficiency of our brewery network. Our income from continuing operations before income taxes in Canada increased in 2014 compared to 2013 by 12.0% to $406.8 million, due to income received from the termination of our MMI joint venture, recorded within special items. Our underlying pretax income decreased by 7.1% to $365.0 million, due to unfavorable foreign currency movements and the impact |
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of terminating our MMI joint venture in the first quarter of 2014, which had a combined negative pretax profit impact of approximately $35 million.
• | In the U.S., MillerCoors grew net sales per hectoliter and increased the percent of sales in above premium, while working to restore growth to Coors Light and Miller Lite. In the fourth quarter of 2014, Miller Lite increased sales to retail for the first time since 2007, benefiting from a redesign based on the brand’s authenticity and heritage. In 2014, the above premium segment continued to grow with higher-margin brands like Redd’s, Blue Moon and Leinenkugel’s Summer Shandy. Our 2014 equity income in MillerCoors increased 4.2% to $561.8 million, while underlying equity income in MillerCoors increased 2.8% to $562.4 million compared to 2013, primarily driven by higher net pricing, favorable brand mix and cost savings, partially offset by commodity and brewery inflation and lower fixed cost absorption. |
• | In our Europe segment, although consumer demand remained weak, our business delivered higher net sales and underlying pretax earnings. Additionally, despite the weak economy and significant flooding in some of our highest share markets, we maintained market share across the region versus the prior year on the strength of our core brands, above-premium portfolio and innovation. In addition to the core brand performances mentioned below, our craft and above-premium brands performed well, with Cobra, Coors Light, Doom Bar and Staropramen outside the Czech Republic leading the growth. In 2014 we reported a loss from continuing operations before income taxes of $111.9 million, versus income from continuing operations of $34.3 million in 2013. The decrease from 2013 is attributable to an impairment charge of $360.0 million recognized in 2014 related to indefinite-lived intangible brand assets compared to an impairment charge of $150.9 million in 2013. Underlying income of $242.7 million increased by 13.8%, compared to $213.3 million in 2013, due to higher net sales, as well as lower supply chain costs and lower general and administrative expenses, partially offset by the negative impact of a mix shift toward higher-cost products and packages and increased marketing investments. |
• | In our MCI segment, we drove significant growth in terms of volume, net sales and gross profit in 2014, despite the continuing challenges in Ukraine and Russia. Our 2014 loss from continuing operations before income taxes increased by 12.7% to $13.3 million, driven by a gain classified as specials items recognized on the sale of our MC Si'hai joint venture in China during the fourth quarter of 2013, along with an increase in marketing investment behind our brands versus 2013. We reduced our underlying pretax loss by 17.9% versus 2013, as a result of strong top-line growth and cost control. |
• | Core brand highlights: |
• | Carling, the number one beer brand in the U.K. and the largest brand in our Europe segment, declined slightly in terms of volume in the year, primarily due to the after-effects of some aggressive World Cup competitor pricing during the second and third quarters of 2014. |
• | Coors Light global volume (including our proportional percentage of MillerCoors' Coors Light volumes) increased 1.9% versus 2013. Coors Light grew volume more than 20% in the U.K., where it is now our second largest brand, and it is growing even faster in our Latin American markets. Due to continued competitive and industry pressures, Coors Light declined in Canada and the U.S. |
• | Molson Canadian in Canada decreased slightly in terms of volume and market share in 2014, but held share in its segment and had stronger 2014 activations, as well as strong net sales per hectoliter growth. |
• | Staropramen volume decreased overall in 2014 versus 2013, mainly driven by overall industry declines and challenges in Czech Republic, Staropramen's primary market, as well as declines in our international markets of Russia and Ukraine, as a result of political and economic instability. Despite severe flooding in Central Europe this year, above premium Staropramen (outside of Czech Republic) grew volume and share in the region and achieved growth in certain international markets. |
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The following table highlights summarized components of our consolidated statements of operations for the years ended December 31, 2014, December 31, 2013, and December 29, 2012, and provides a reconciliation of "underlying income", a non-GAAP measure, to its nearest U.S. GAAP measure. See Part II-Item 8 Financial Statements and Supplementary Data, “Consolidated Statements of Operations” for additional details of our U.S. GAAP results.
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | |||||||||||||
(In millions, except percentages and per share data) | |||||||||||||||||
Volume in hectoliters | 30.445 | (0.2 | )% | 30.521 | 20.4 | % | 25.343 | ||||||||||
Net sales | $ | 4,146.3 | (1.4 | )% | $ | 4,206.1 | 7.4 | % | $ | 3,916.5 | |||||||
Net income attributable to MCBC from continuing operations | $ | 513.5 | (9.2 | )% | $ | 565.3 | 28.0 | % | $ | 441.5 | |||||||
Adjustments: | |||||||||||||||||
Special items, net(1) | 324.4 | 62.2 | % | 200.0 | 145.7 | % | 81.4 | ||||||||||
42% of MillerCoors special items, net of tax(2) | 0.6 | (92.8 | )% | 8.3 | (38.1 | )% | 13.4 | ||||||||||
Acquisition, integration and financing related costs(3) | — | (100.0 | )% | 10.7 | (93.7 | )% | 170.5 | ||||||||||
Unrealized mark-to-market (gains) and losses(4) | 3.7 | (76.0 | )% | 15.4 | 20.3 | % | 12.8 | ||||||||||
Other non-core items(5) | (11.3 | ) | (51.9 | )% | (23.5 | ) | N/M | (5.0 | ) | ||||||||
Tax impact of Serbia statutory tax rate increase(6) | — | — | % | — | (100.0 | )% | 38.3 | ||||||||||
Noncontrolling interest effect on special items(7) | — | — | % | — | (100.0 | )% | (5.1 | ) | |||||||||
Tax effect on special and non-GAAP items(8) | (62.4 | ) | 27.1 | % | (49.1 | ) | 31.6 | % | (37.3 | ) | |||||||
Non-GAAP: Underlying income attributable to MCBC from continuing operations, net of tax | $ | 768.5 | 5.7 | % | $ | 727.1 | 2.3 | % | $ | 710.5 | |||||||
Net income attributable to MCBC per diluted share from continuing operations | $ | 2.76 | (10.1 | )% | $ | 3.07 | 26.3 | % | $ | 2.43 | |||||||
Non-GAAP: Underlying net income attributable to MCBC per diluted share from continuing operations | $ | 4.13 | 4.6 | % | $ | 3.95 | 1.0 | % | $ | 3.91 | |||||||
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. Special items for the year ended December 31, 2014 includes accelerated amortization expense of $4.9 million and accelerated depreciation expense of $4.0 million, which are included in our adjustments to arrive at underlying EBITDA in the table below. |
(2) | See "Results of Operations", "United States Segment" under the sub-heading "Special Items" in this section for additional information. There were no tax effects related to our share of MillerCoors special items in 2014, 2013 or 2012. |
(3) | In connection with the acquisition of StarBev in 2012 ("Acquisition"), we recognized fees in marketing, general and administrative expenses of $10.7 million and $40.2 million in 2013 and 2012, respectively, of which $2.3 million was recorded as depreciation expense in 2013. |
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
33
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.
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 unrealized gains of $0.5 million and unrealized losses of $2.4 million and $23.8 million during 2014, 2013 and 2012, respectively, related to foreign currency movements on this Convertible Note. We additionally recorded a net loss within other income (expense) 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 unrealized 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 unrealized losses of $4.2 million and $2.7 million in 2014 and 2013, respectively, and an unrealized gain of $3.0 million in 2012.
(5) | In 2014, we recognized a gain of $11.3 million within marketing, general and administrative expenses related to the release of an indirect tax reserve recorded in conjunction with the initial purchase accounting for the Acquisition and is related to the settlement of certain local country regulatory matters associated with pre-acquisition periods. |
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.
(6) | 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. |
(7) | 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 to the goodwill impairment charge in our MC Si'hai joint venture, for which we subsequently sold our ownership interest in 2013. |
(8) | The effect of taxes on the adjustments used to arrive at underlying net income, a non-GAAP measure, is calculated based on applying the 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. Additionally, the adjustment for 2014 includes an income tax benefit of $16.2 million recognized in the first quarter of 2014 related to the release of an |
34
income tax reserve recorded in conjunction with the initial purchase accounting for the Acquisition and is related to the settlement of certain local country regulatory matters associated with pre-acquisition periods.
The following table highlights summarized components of our consolidated statements of operations for the years ended December 31, 2014, December 31, 2013, and December 29, 2012, and provides a reconciliation of "underlying EBITDA", a non-GAAP measure, to its nearest U.S. GAAP measure. See Part II-Item 8 Financial Statements and Supplementary Data, “Consolidated Statements of Operations” for additional details of our U.S. GAAP results.
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | |||||||||||||
(In millions, except percentages and per share data) | |||||||||||||||||
Net income attributable to MCBC from continuing operations | $ | 513.5 | (9.2 | )% | $ | 565.3 | 28.0 | % | $ | 441.5 | |||||||
Add: Net income (loss) attributable to noncontrolling interests | 3.8 | (26.9 | )% | 5.2 | N/M | (3.9 | ) | ||||||||||
Net income (loss) from continuing operations | $ | 517.3 | (9.3 | )% | $ | 570.5 | 30.4 | % | $ | 437.6 | |||||||
Adjustments: | |||||||||||||||||
Add: Interest expense (income), net | 133.7 | (21.4 | )% | 170.1 | (8.1 | )% | 185.0 | ||||||||||
Add: Income tax expense (benefit) | 69.0 | (17.9 | )% | 84.0 | (45.6 | )% | 154.5 | ||||||||||
Add: Depreciation and amortization | 313.0 | (2.3 | )% | 320.5 | 17.5 | % | 272.7 | ||||||||||
Adjustments included in underlying income(1) | 316.8 | 56.4 | % | 202.6 | (22.0 | )% | 259.7 | ||||||||||
Adjustments to arrive at underlying EBITDA(2) | (8.9 | ) | 15.6 | % | (7.7 | ) | (82.0 | )% | (42.8 | ) | |||||||
Adjustments to arrive at underlying EBITDA related to our investment in MillerCoors(3) | 129.6 | 0.9 | % | 128.5 | (2.1 | )% | 131.2 | ||||||||||
Non-GAAP: Underlying EBITDA | $ | 1,470.5 | 0.1 | % | $ | 1,468.5 | 5.1 | % | $ | 1,397.9 | |||||||
N/M = Not meaningful
(1) | Includes adjustments to non-GAAP underlying income within the table above related to special and non-core items. |
(2) | Represents adjustments to remove amounts related to interest, depreciation and amortization included in the adjustments to non-GAAP underlying income above, as these items are added back as adjustments to net income attributable to MCBC from continuing operations. |
(3) | Adjustments to our equity income from MillerCoors, which include our proportionate share of MillerCoors' interest, income tax, depreciation and amortization, special items, and amortization of the difference between the MCBC contributed cost basis and proportionate 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"). We finalized the termination of our MMI joint venture relationship in the first quarter of 2014. As such, our worldwide beer volume for the year ended December 31, 2014, includes our percentage share of volume in MMI through the transition period ended February 28, 2014. 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, 2014, December 31, 2013, and December 29, 2012:
For the years ended | ||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | ||||||||||
(In millions, except percentages) | ||||||||||||||
Volume in hectoliters: | ||||||||||||||
Financial volume | 30.445 | (0.2 | )% | 30.521 | 20.4 | % | 25.343 | |||||||
Royalty volume(1) | 1.580 | 16.8 | % | 1.353 | 27.2 | % | 1.064 | |||||||
Owned volume | 32.025 | 0.5 | % | 31.874 | 20.7 | % | 26.407 | |||||||
Proportionate share of equity investment sales-to-retail(2) | 26.939 | (3.3 | )% | 27.864 | (2.8 | )% | 28.652 | |||||||
Total worldwide beer volume | 58.964 | (1.3 | )% | 59.738 | 8.5 | % | 55.059 | |||||||
(1) | Includes MCI segment royalty volume that is primarily in Russia, Ukraine and Mexico, and Europe segment royalty volume in Republic of Ireland. |
(2) | Reflects the addition of our proportionate share of equity method investments STR for the periods presented. |
Our worldwide beer volume decreased in 2014 compared to 2013, primarily due to lower volumes in the U.S. and Canada, partially offset by increased volumes from MCI. Worldwide beer volume increased 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.
Net Sales
The following table highlights the drivers of change in net sales for the year ended December 31, 2014, versus December 31, 2013 by segment (in percentages):
Percent Change 2014 versus 2013 | |||||||||||||||
Volume | Price, Product and Geography Mix | Currency | Other | Total | |||||||||||
Consolidated | (0.9 | )% | 1.2 | % | (1.7 | )% | — | % | (1.4 | )% | |||||
Canada | (3.0 | )% | 1.8 | % | (6.5 | )% | — | % | (7.7 | )% | |||||
Europe | (0.3 | )% | 1.0 | % | 2.7 | % | — | % | 3.4 | % | |||||
MCI | 19.8 | % | (2.4 | )% | (3.8 | )% | — | % | 13.6 | % | |||||
Corporate(1) | — | % | — | % | — | % | (8.3 | )% | (8.3 | )% | |||||
Eliminations(2) | (10.4 | )% | — | % | — | % | — | % | (10.4 | )% | |||||
(1) | Corporate net sales revenue includes the results of our water resources and energy operations in the state of Colorado. |
(2) | Eliminations represent intercompany sales from Europe to MCI and are included in the Europe driver changes. These intercompany sales are eliminated in consolidated totals. |
Cost Savings Initiatives
Cost reductions across our company in 2014 were largely consistent with 2013, totaling more than $70 million, driven by our Canada and Europe segments. MillerCoors delivered incremental cost savings in 2014 of approximately $143 million, of which our 42% share is approximately $60 million.
Depreciation and Amortization
Depreciation and amortization expense was $313.0 million in 2014, a decrease of $7.5 million compared to 2013, primarily due to decreased amortization of our intangible assets, as well as the impact of changes in foreign currency rates. 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.
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Income Taxes
Our effective tax rate, a U.S. GAAP measure, was approximately 12% in 2014, 13% in 2013 and 26% in 2012. 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, tax planning strategies and favorable resolution of unrecognized tax positions. The 2014 effective tax rate decreased versus 2013 due to the settlement of our advance pricing agreement between the U.S. and Canada tax authorities, and the favorable settlement of certain unrecognized tax positions in several jurisdictions. Our 2014 and 2013 effective tax rate and underlying effective tax rate, a non-GAAP measure, were lower compared to 2012 primarily due 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, 2014 | December 31, 2013 | December 29, 2012 | ||||||
Effective tax rate | 12 | % | 13 | % | 26 | % | ||
Adjustments: | ||||||||
Tax rate changes | — | % | — | % | (5 | )% | ||
Acquisition-related costs | — | % | — | % | (2 | )% | ||
China impairments | — | % | — | % | (1 | )% | ||
Tax impact of special and non-core items | 3 | % | 2 | % | — | % | ||
Non-GAAP: Underlying effective tax rate | 15 | % | 15 | % | 18 | % | ||
Additionally, our unrecognized tax benefits decreased by $78.1 million, primarily driven by the favorable resolution of unrecognized tax positions, the settlement of certain tax audits and the expiration of various statutes of limitation. See Part II—Item 8 Financial Statements and Supplementary Data, Note 7, "Income Tax" of the Notes for further discussion.
Discontinued Operations
Discontinued operations are 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 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.
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Results of Operations
Canada Segment
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters | 8.075 | (3.1 | )% | 8.332 | (2.0 | )% | 8.505 | ||||||||||
Sales | $ | 2,363.4 | (8.2 | )% | $ | 2,575.1 | (3.7 | )% | $ | 2,675.2 | |||||||
Excise taxes | (569.5 | ) | (9.8 | )% | (631.3 | ) | (1.1 | )% | (638.4 | ) | |||||||
Net sales | 1,793.9 | (7.7 | )% | 1,943.8 | (4.6 | )% | 2,036.8 | ||||||||||
Cost of goods sold | (1,021.6 | ) | (7.5 | )% | (1,104.3 | ) | (1.5 | )% | (1,120.7 | ) | |||||||
Gross profit | 772.3 | (8.0 | )% | 839.5 | (8.4 | )% | 916.1 | ||||||||||
Marketing, general and administrative expenses | (412.5 | ) | (7.9 | )% | (448.0 | ) | (6.0 | )% | (476.5 | ) | |||||||
Special items, net(1) | 41.8 | N/M | (30.7 | ) | 124.1 | % | (13.7 | ) | |||||||||
Operating income (loss) | 401.6 | 11.3 | % | 360.8 | (15.3 | )% | 425.9 | ||||||||||
Other income (expense), net | 5.2 | 108.0 | % | 2.5 | (186.2 | )% | (2.9 | ) | |||||||||
Income (loss) from continuing operations before income taxes | $ | 406.8 | 12.0 | % | $ | 363.3 | (14.1 | )% | $ | 423.0 | |||||||
Adjusting items: | |||||||||||||||||
Special items, net(1) | (41.8 | ) | N/M | 30.7 | 124.1 | % | 13.7 | ||||||||||
Other non-core items | — | (100.0 | )% | (1.2 | ) | N/M | — | ||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | 365.0 | (7.1 | )% | $ | 392.8 | (10.1 | )% | $ | 436.7 | |||||||
N/M = Not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for detail of special items. |
Significant events
In the fourth quarter of 2014, we entered into an agreement with SABMiller ("Miller") for the accelerated termination of our license agreement, effective March 2015, under which we had exclusive rights to distribute certain Miller products in Canada. As a result, beginning in the second quarter of 2015 we will no longer distribute the Miller brands in Canada, which will adversely impact our volume and sales prospectively. Additionally, in the fourth quarter of 2014, we became aware of a legal dispute related to Brewers' Retail, Inc. ("BRI"), our joint venture arrangement related to the distribution and retail sale of beer in Ontario, which could result in an adverse impact to our future results. Further, we finalized the termination of our MMI joint venture relationship in the first quarter of 2014. As such, our results for the year ended December 31, 2014, include our percentage share of the MMI results through the transition period ended February 28, 2014. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" and Note 19, "Commitments and Contingencies" of the Notes for further discussion of these matters impacting our Canada business.
Foreign currency impact on results
During 2014, the Canadian Dollar ("CAD") depreciated versus the USD on an average basis, resulting in a decrease of $22.9 million and $18.0 million to our 2014 USD earnings before income taxes and USD underlying pretax income, respectively. During 2013, the CAD depreciated against the USD on an average basis, resulting in a decrease of $9.4 million and $11.3 million to our 2013 USD earnings before income taxes and USD underlying pretax income, respectively. Included in these amounts are both translational and transactional impacts of changes in foreign exchange rates. The impact of transaction gains and losses is recorded within other income (expense).
Volume and net sales
STRs decreased 4.7% in 2014 compared to 2013, driven by the termination of the MMI joint venture, decline in the overall industry, weak economic factors, increased competitor promotional activity and unfavorable weather across key regions this year.
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The Canadian beer industry STRs decreased in 2014 compared to calendar year 2013. Our market share also declined on a full-year basis.
Sales volume decreased in 2014 compared to 2013, due to the continued industry softness and increased competitive pressure on our core brands.
Net sales per hectoliter increased 1.8% in local currency in 2014 compared to 2013, driven by favorable pricing and mix shift to higher priced brands and packages.
STRs decreased 1.9% in 2013 compared to 2012, 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.
Sales volume decreased in 2013 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.
Net sales per hectoliter increased 0.4% in local currency in 2013 compared to 2012, driven by favorable pricing and export business results offset by mix shift to lower priced brands and packages.
Cost of goods sold
Cost of goods sold per hectoliter increased 2.3% in local currency in 2014 compared to 2013, driven by input inflation and fixed-cost deleverage, the termination of the Modelo joint venture, sales mix shift toward higher-cost brands and packages, and increased promotional packaging expense. These factors were partially offset by cost savings. Under the MMI arrangement, we recognized equity earnings within cost of goods sold of $0.7 million, $11.7 million and $12.0 million, during the years ended 2014, 2013 and 2012, respectively.
Cost of goods sold per hectoliter increased 3.6% in local currency in 2013 compared to 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.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased 1.4% in local currency in 2014 compared to 2013, driven by cost savings, partially offset by higher marketing spending and incentive compensation, as well as cycling administrative cost recoveries from MMI. During the years ended 2014, 2013 and 2012, MCC recognized administrative cost recoveries under our agency and services agreement with MMI of $0.7 million, $6.8 million and $7.5 million, respectively. Marketing spend and related recoveries under this agreement had zero impact on our results for all periods presented.
Marketing, general and administrative expenses decreased 3.2% in local currency in 2013 compared to 2012, driven by reductions in incentive compensation and overhead costs.
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United States Segment
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 31, 2012 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volumes in hectoliters(1) | 72.701 | (2.1 | )% | 74.274 | (2.7 | )% | 76.299 | ||||||||||
Sales | $ | 8,990.4 | 0.2 | % | $ | 8,969.8 | — | % | $ | 8,966.6 | |||||||
Excise taxes | (1,142.0 | ) | (2.3 | )% | (1,169.0 | ) | (3.0 | )% | (1,205.5 | ) | |||||||
Net sales | 7,848.4 | 0.6 | % | 7,800.8 | 0.5 | % | 7,761.1 | ||||||||||
Cost of goods sold | (4,743.8 | ) | 0.4 | % | (4,723.7 | ) | 0.7 | % | (4,689.7 | ) | |||||||
Gross profit | 3,104.6 | 0.9 | % | 3,077.1 | 0.2 | % | 3,071.4 | ||||||||||
Marketing, general and administrative expenses | (1,755.9 | ) | (0.8 | )% | (1,769.9 | ) | (3.2 | )% | (1,828.5 | ) | |||||||
Special items, net | (1.4 | ) | (92.9 | )% | (19.8 | ) | (37.7 | )% | (31.8 | ) | |||||||
Operating income | 1,347.3 | 4.7 | % | 1,287.4 | 6.3 | % | 1,211.1 | ||||||||||
Interest income (expense), net | (1.1 | ) | (31.3 | )% | (1.6 | ) | 14.3 | % | (1.4 | ) | |||||||
Other income (expense), net | 5.5 | 175.0 | % | 2.0 | 17.6 | % | 1.7 | ||||||||||
Income from continuing operations before income taxes and noncontrolling interests | 1,351.7 | 5.0 | % | 1,287.8 | 6.3 | % | 1,211.4 | ||||||||||
Income tax expense | (6.1 | ) | 56.4 | % | (3.9 | ) | (29.1 | )% | (5.5 | ) | |||||||
Income from continuing operations | 1,345.6 | 4.8 | % | 1,283.9 | 6.5 | % | 1,205.9 | ||||||||||
Net income attributable to noncontrolling interests | (19.4 | ) | 44.8 | % | (13.4 | ) | (10.7 | )% | (15.0 | ) | |||||||
Net income attributable to MillerCoors | $ | 1,326.2 | 4.4 | % | $ | 1,270.5 | 6.7 | % | $ | 1,190.9 | |||||||
Adjusting items: | |||||||||||||||||
Special items, net of tax | 1.4 | (92.9 | )% | 19.8 | (37.7 | )% | 31.8 | ||||||||||
Non-GAAP: Underlying net income attributable to MillerCoors | $ | 1,327.6 | 2.9 | % | $ | 1,290.3 | 5.5 | % | $ | 1,222.7 | |||||||
(1) | Includes contract brewing and company-owned distributor sales, which are excluded from our worldwide beer volume calculation. |
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The following represents our proportionate share of MillerCoors' net income reported under the equity method:
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 31, 2012 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Net income attributable to MillerCoors | $ | 1,326.2 | 4.4 | % | $ | 1,270.5 | 6.7 | % | $ | 1,190.9 | |||||||
MCBC economic interest | 42 | % | 42 | % | 42 | % | |||||||||||
MCBC proportionate share of MillerCoors net income | 557.0 | 4.4 | % | 533.6 | 6.7 | % | 500.2 | ||||||||||
Amortization of the difference between MCBC contributed cost basis and proportionate share of the underlying equity in net assets of MillerCoors(1) | 4.6 | — | % | 4.6 | (6.1 | )% | 4.9 | ||||||||||
Share-based compensation adjustment(1) | 0.2 | (75.0 | )% | 0.8 | (86.2 | )% | 5.8 | ||||||||||
Equity Income in MillerCoors | $ | 561.8 | 4.2 | % | $ | 539.0 | 5.5 | % | $ | 510.9 | |||||||
Adjusting items: | |||||||||||||||||
MCBC proportionate share of MillerCoors special items, net of tax | 0.6 | (92.8 | )% | 8.3 | (38.1 | )% | 13.4 | ||||||||||
Non-GAAP Equity Income in MillerCoors | $ | 562.4 | 2.8 | % | $ | 547.3 | 4.4 | % | $ | 524.3 | |||||||
(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. |
Percent Change 2014 versus 2013 | |||||||||||||||
Volume | Price, Product and Geography Mix | Currency | Other | Total | |||||||||||
MillerCoors | (2.2 | )% | 2.8 | % | — | % | — | % | 0.6 | % | |||||
The discussion below highlights the MillerCoors results of operations for the year ended December 31, 2014, versus the year ended December 31, 2013, and for the year ended December 31, 2013, versus the year ended December 31, 2012.
Volume and net sales
Domestic STRs declined 2.5% in 2014 compared to 2013, driven by declines in both the premium light and economy portfolios, partially offset by growth in Redd's, Blue Moon, Leinenkugel's and Coors Banquet.
Total STWs volume declined 2.1% in 2014 compared to 2013. Domestic STWs decreased 2.5% versus 2013, driven by the decline in STRs, while contract brewing volume increased slightly.
Domestic net sales per hectoliter increased 2.9% in 2014 compared to 2013, driven by favorable net pricing and positive brand mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 2.8% in 2014 compared to 2013.
Domestic STRs declined 2.8% in 2013 compared to 2012, driven by declines in both the premium light and economy 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.
Cost of goods sold
Cost of goods sold per hectoliter increased 2.6% in 2014 compared to 2013, driven by commodity and brewery inflation, lower fixed-cost absorption, and higher costs associated with brand innovation.
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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.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased slightly in 2014 compared to 2013, driven primarily by cost reductions, lower pension expenses and promotional spending, partially offset by increased brand investments.
Marketing, general and administrative expenses decreased in 2013 compared to 2012, driven primarily by a reduction in media investment and lower pension expense.
Special items, net
During 2014, MillerCoors recognized special charges of $1.4 million related to restructuring activities.
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.
Other information
MillerCoors distributes its excess cash to its owners, SABMiller and MCBC, on a 58% - 42% basis, respectively. As of December 31, 2014, and December 31, 2013, MillerCoors had cash of $9.3 million and $12.3 million, respectively. As of December 31, 2014, and December 31, 2013, MillerCoors had total debt of $1.7 million and $10.6 million, respectively. There are no restrictions from external sources on its ability to make cash distributions to its owners.
MillerCoors recognized $311.1 million, $291.5 million and $285.4 million of depreciation and amortization during 2014, 2013 and 2012, respectively.
MillerCoors contributed $97.7 million (our 42% share was $41.0 million) to its defined benefit pension plans in 2014. For 2015, MillerCoors' contributions to its defined benefit pension plans are expected to be approximately $100 million to $120 million (our 42% share is $42 million to $50 million), which are not included in our contractual cash obligations.
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Europe Segment
The following represents our results of operations for Europe for the years ended December 31, 2014, December 31, 2013, and December 29, 2012. Amounts for the year ended December 29, 2012 include the pro forma results related to Central Europe to give effect to the Acquisition as if it had occurred at the beginning of fiscal year 2012.
For the years ended | |||||||||||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||||||||||
Actual | Change | Actual | Actual-Europe(1) | Pro Forma-Central Europe(5) | Pro Forma Combined 2012(5) | Change | |||||||||||||||||||
(In millions, except percentages) | |||||||||||||||||||||||||
Volume in hectoliters(2) | 21.083 | (0.3 | )% | 21.146 | 15.896 | 5.303 | 21.199 | (0.3 | )% | ||||||||||||||||
Sales(2) | $ | 3,384.1 | 3.6 | % | $ | 3,265.4 | $ | 2,783.6 | $ | 420.5 | $ | 3,204.1 | 1.9 | % | |||||||||||
Excise taxes | (1,183.8 | ) | 4.1 | % | (1,137.1 | ) | (1,036.1 | ) | (92.8 | ) | (1,128.9 | ) | 0.7 | % | |||||||||||
Net sales(2)(6) | 2,200.3 | 3.4 | % | 2,128.3 | 1,747.5 | 327.7 | 2,075.2 | 2.6 | % | ||||||||||||||||
Cost of goods sold(7) | (1,375.8 | ) | 1.3 | % | (1,357.5 | ) | (1,159.9 | ) | (194.2 | ) | (1,354.1 | ) | 0.3 | % | |||||||||||
Gross profit | 824.5 | 7.0 | % | 770.8 | 587.6 | 133.5 | 721.1 | 6.9 | % | ||||||||||||||||
Marketing, general and administrative expenses(8) | (573.1 | ) | 0.6 | % | (569.5 | ) | (431.4 | ) | (108.8 | ) | (540.2 | ) | 5.4 | % | |||||||||||
Special items, net(3) | (365.9 | ) | 112.2 | % | (172.4 | ) | (23.5 | ) | — | (23.5 | ) | N/M | |||||||||||||
Operating income (loss) | (114.5 | ) | N/M | 28.9 | 132.7 | 24.7 | 157.4 | (81.6 | )% | ||||||||||||||||
Interest income(4) | 4.4 | (10.2 | )% | 4.9 | 5.7 | — | 5.7 | (14.0 | )% | ||||||||||||||||
Other income (expense), net | (1.8 | ) | N/M | 0.5 | (2.2 | ) | (0.6 | ) | (2.8 | ) | (117.9 | )% | |||||||||||||
Income (loss) from continuing operations before income taxes | $ | (111.9 | ) | N/M | $ | 34.3 | $ | 136.2 | $ | 24.1 | $ | 160.3 | (78.6 | )% | |||||||||||
Adjusting items: | |||||||||||||||||||||||||
Special items, net(3) | 365.9 | 112.2 | % | 172.4 | 23.5 | — | 23.5 | N/M | |||||||||||||||||
Acquisition and integration related costs | — | (100.0 | )% | 6.6 | 13.0 | (11.1 | ) | 1.9 | N/M | ||||||||||||||||
Other non-core items | (11.3 | ) | N/M | — | (0.7 | ) | — | (0.7 | ) | (100.0 | )% | ||||||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | 242.7 | 13.8 | % | $ | 213.3 | $ | 172.0 | $ | 13.0 | $ | 185.0 | 15.3 | % | |||||||||||
N/M = Not meaningful
(1) | 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. |
(2) | Reflects gross segment sales and for 2014, 2013 and 2012 includes intercompany sales to MCI of 0.057 million hectoliters, 0.066 million hectoliters and 0.246 million hectoliters, respectively and $5.3 million, $4.8 million 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. |
(3) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for detail of special items. |
(4) | 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. |
(5) | 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. These amounts also include pro forma adjustments as if StarBev had been acquired on January 1, 2012, the first day of our 2012 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 January 1, 2012, nor are they |
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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 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.
(6) | To align StarBev to U.S. GAAP and to our accounting policies, StarBev's historical net sales were reduced by $25.4 million for the pre-Acquisition period of January 1, 2012, to June 15, 2012, 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, that StarBev classified as amortization associated with intangible assets related to customer supply rights. |
(7) | 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, of distribution and logistics costs from marketing, general and administrative expenses to cost of goods sold. Additionally, there were $2.1 million for the pre-Acquisition period of January 1, 2012, to June 15, 2012, 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, 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. |
(8) | 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, to reflect reclassifications from the financial statements of StarBev to align presentation with ours. Along with the reclassifications discussed in notes (6) and (7) above, $2.3 million for the pre-Acquisition period of January 1, 2012, to June 15, 2012, was 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 for the pre-Acquisition period of January 1, 2012, to June 15, 2012, 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 2014 and 2013 and pro forma results for 2012. |
Significant events
Our contract for the distribution of the Modelo brands in the U.K. expired as of December 31, 2014, and the termination of our contract brewing arrangement with Heineken in the U.K. will be effective at the end of April 2015. As a result of the loss of these agreements, we are taking actions to lessen the impact of losing this revenue. Additionally, during the fourth quarter of 2014, we received an assessment from a local country regulatory authority in Europe. While we intend to vigorously challenge the validity of the assessment and defend our position, if the assessment, as issued, is ultimately upheld it could materially affect our results of operations. See Part I—Item 1A Risk Factors and Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes for further discussion.
Foreign currency impact on results
Our Europe segment operates in numerous countries within Europe, and each country's operations utilize distinct currencies. During 2014, foreign currency movements reduced our Europe USD loss from continuing operations before income taxes by $8.8 million, and increased USD underlying pretax income by $7.7 million. During 2013, foreign currency movements negatively impacted our Europe USD income from continuing operations before income taxes by $2.8 million, and positively impacted our USD underlying pretax income by $4.6 million. On a pro forma basis, foreign currency movements negatively
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impacted our Europe USD income from continuing operations before income taxes by $3.7 million and positively impacted USD underlying pretax income by $2.8 million. Included in these amounts are both translational and transactional impacts of changes in foreign exchange rates. The impact of transactional gains and losses is recorded within other income (expense).
Volume and net sales
Sales volume decreased slightly in 2014 compared to 2013, due to weak consumer demand, as well as the impacts of significant flooding in the Balkans region in the second quarter of 2014. These factors were partially offset by improved performance in Hungary, Romania, Czech Republic and the U.K.
The business held market share overall, despite significant flooding in some of our highest share markets.
Net sales per hectoliter increased 1.0% in local currency in 2014 compared to 2013, due to positive mix.
Sales volume decreased 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 2013. These factors were partially offset by improved performance in the U.K., as well as overall positive pricing.
During 2013, the business delivered year over year growth in almost all key markets.
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.
Cost of goods sold
Cost of goods sold per hectoliter decreased 1.1% in local currency in 2014 compared to 2013, primarily driven by lower supply chain and distribution costs offsetting negative mix impact.
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.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased 1.4% in local currency in 2014 compared to 2013, driven by cost savings, the release of a regulatory reserve in the third quarter and a non-core gain related to the favorable resolution of an indirect-tax reserve during the first quarter of 2014, partially offset by higher investment behind core brands and innovation.
Marketing, general and administrative expenses increased 5.3% in local currency in 2013 compared to 2012, on a pro forma basis, driven by driven by higher incentive compensation and investment behind core brands and innovation.
Special items, net
Due to the continued macroeconomic challenges and worsening of the overall European economic environment, as well as significant flooding that occurred in certain of our Central European markets in the second quarter of 2014, we recognized charges during the third quarter of 2014 of $360.0 million related to the impairment of two indefinite-lived intangible brand assets in Europe resulting from our annual impairment testing process. We also recognized charges in 2013 of $150.9 million related to the impairment of indefinite-lived intangible brands in Europe. If the macroeconomic environment continues to worsen or falls into recession, or certain brands continue to decline in volume, there is a risk of further impairment of certain brands in the future. See Part II—Item 8 Financial Statements and Supplementary Data, Note 12, "Goodwill and Intangible Assets" for further discussion.
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Molson Coors International Segment
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters(1) | 1.344 | 21.2 | % | 1.109 | (6.6 | )% | 1.188 | ||||||||||
Sales | $ | 184.2 | 13.2 | % | $ | 162.7 | (4.9 | )% | $ | 171.0 | |||||||
Excise taxes | (27.9 | ) | 11.2 | % | (25.1 | ) | 4.6 | % | (24.0 | ) | |||||||
Net sales | 156.3 | 13.6 | % | 137.6 | (6.4 | )% | 147.0 | ||||||||||
Cost of goods sold(2) | (96.5 | ) | 13.5 | % | (85.0 | ) | (5.7 | )% | (90.1 | ) | |||||||
Gross profit | 59.8 | 13.7 | % | 52.6 | (7.6 | )% | 56.9 | ||||||||||
Marketing, general and administrative expenses | (73.1 | ) | 6.1 | % | (68.9 | ) | (21.2 | )% | (87.4 | ) | |||||||
Special items, net(3) | — | (100.0 | )% | 4.4 | (110.4 | )% | (42.2 | ) | |||||||||
Operating income (loss) | (13.3 | ) | 11.8 | % | (11.9 | ) | (83.6 | )% | (72.7 | ) | |||||||
Other income (expense), net | — | (100.0 | )% | 0.1 | (83.3 | )% | 0.6 | ||||||||||
Income (loss) from continuing operations before income taxes(4) | $ | (13.3 | ) | 12.7 | % | $ | (11.8 | ) | (83.6 | )% | $ | (72.1 | ) | ||||
Adjusting items: | |||||||||||||||||
Special items, net(3) | — | (100.0 | )% | (4.4 | ) | (110.4 | )% | 42.2 | |||||||||
Other non-core items | — | — | % | — | (100.0 | )% | 0.5 | ||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | (13.3 | ) | (17.9 | )% | $ | (16.2 | ) | (44.9 | )% | $ | (29.4 | ) | ||||
(1) | Excludes royalty volume of 1.351 million hectoliters, 1.141 million hectoliters and 0.810 million hectoliters in 2014, 2013 and 2012, respectively. |
(2) | Reflects gross segment amounts and for 2014, 2013 and 2012 includes intercompany cost of goods sold from Europe of $5.3 million, $4.8 million and $16.0 million, respectively. The offset is included within Europe net sales. These amounts are eliminated in the consolidated totals. |
(3) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for detail of special items. |
(4) | Includes loss attributable to noncontrolling interest of $8.0 million in 2012. |
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 2014 and 2013. This includes an insignificant effect on both USD losses before income taxes and USD underlying pretax loss. The impact of transactional foreign currency gains and losses is recorded within other income (expense).
Volume and net sales
Total sales volume, including royalty volumes, increased 19.8% and sales volume, excluding royalty volume, increased by 21.2% in 2014 compared to 2013, due to strong Coors Light growth in Latin America and volume growth in India.
Net sales per hectoliter decreased 6.3% in 2014 compared to 2013, driven by geographic mix and foreign currency movements.
Sales volume, including royalty volumes, 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 Latin America markets, partially 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 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.
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Cost of goods sold
Cost of goods sold per hectoliter decreased 6.3% in 2014 compared to 2013, due to sales mix changes, foreign currency movement and geography mix.
Cost of goods sold per hectoliter increased 1.1% in 2013 compared to 2012, due to the addition of contract brewing volume in India.
Marketing, general and administrative expenses
Marketing general and administrative expenses increased in 2014 compared to 2013, due to increases in marketing investments, partially offset by lower overhead expenses and foreign currency movements.
Marketing general and administrative expenses decreased 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.
Corporate
For the years ended | |||||||||||||||||
December 31, 2014 | Change | December 31, 2013 | Change | December 29, 2012 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters | — | — | % | — | — | % | — | ||||||||||
Sales | $ | 1.1 | (8.3 | )% | $ | 1.2 | — | % | $ | 1.2 | |||||||
Excise taxes | — | — | % | — | — | % | — | ||||||||||
Net sales | 1.1 | (8.3 | )% | 1.2 | — | % | 1.2 | ||||||||||
Cost of goods sold | (4.7 | ) | 30.6 | % | (3.6 | ) | N/M | 2.2 | |||||||||
Gross profit | (3.6 | ) | 50.0 | % | (2.4 | ) | (170.6 | )% | 3.4 | ||||||||
Marketing, general and administrative expenses | (105.2 | ) | (2.0 | )% | (107.4 | ) | (17.9 | )% | (130.8 | ) | |||||||
Special items, net(1) | (0.3 | ) | (76.9 | )% | (1.3 | ) | (35.0 | )% | (2.0 | ) | |||||||
Operating income (loss) | (109.1 | ) | (1.8 | )% | (111.1 | ) | (14.1 | )% | (129.4 | ) | |||||||
Interest expense, net | (138.1 | ) | (21.1 | )% | (175.0 | ) | (8.2 | )% | (190.7 | ) | |||||||
Other income (expense), net | (9.9 | ) | (162.7 | )% | 15.8 | (118.4 | )% | (85.8 | ) | ||||||||
Income (loss) from continuing operations before income taxes | $ | (257.1 | ) | (4.9 | )% | $ | (270.3 | ) | (33.4 | )% | $ | (405.9 | ) | ||||
Adjusting items: | |||||||||||||||||
Special items, net(1) | 0.3 | (76.9 | )% | 1.3 | (35.0 | )% | 2.0 | ||||||||||
Acquisition and integration related costs | — | (100.0 | )% | 4.1 | (97.4 | )% | 157.5 | ||||||||||
Unrealized mark-to-market (gains) and losses | 3.7 | (76.0 | )% | 15.4 | 20.3 | % | 12.8 | ||||||||||
Other non-core items | — | (100.0 | )% | (22.3 | ) | N/M | (4.8 | ) | |||||||||
Non-GAAP: Underlying pretax income (loss) | $ | (253.1 | ) | (6.9 | )% | $ | (271.8 | ) | 14.0 | % | $ | (238.4 | ) | ||||
N/M = Not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for detail of special items. |
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased slightly in 2014 compared to 2013, due to acquisition and related integration costs recognized in 2013.
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Marketing, general and administrative expenses decreased in 2013 compared to 2012, due to higher acquisition and related integration costs recognized in 2012.
Interest expense, net
Net interest expense decreased 2014 compared to 2013, driven by our ongoing efforts focused on deleveraging over the last year, which resulted in lower interest incurred on our outstanding borrowings, as well as an additional loss of $5.4 million included in 2013, related to the change in fair value on the conversion feature associated with the €500 million convertible note.
Net interest expense decreased in 2013 compared to 2012, primarily driven by additional interest amounts incurred in 2012 related to financing activities in connection with the Acquisition, as well as the resulting lower interest costs following the debt repayments in 2013.
Other income (expense), net
The impact of transactional gains and losses is recorded within other income (expense). Other income in 2013 also includes a gain of $22.3 million resulting from the sale of a non-operating asset.
Other expense in 2012 was 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.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Other Income and Expense" of the Notes for further discussion of other income (expense) amounts.
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, anticipated dividend payments, potential share repurchases 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 with 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 customers 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, 2014, approximately 93% 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 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.
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Net Working Capital
As of December 31, 2014, and December 31, 2013, we had debt-free net working capital of positive $103.0 million and negative $36.8 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, 2014 | December 31, 2013(1) | |||||||
(In millions) | ||||||||
Current assets | $ | 1,578.9 | $ | 1,537.7 | ||||
Less: Current liabilities | (2,325.3 | ) | (2,161.4 | ) | ||||
Add back: Current portion of long-term debt and short-term borrowings | 849.4 | 586.9 | ||||||
Net working capital | $ | 103.0 | $ | (36.8 | ) | |||
(1) | Current liabilities as of December 31, 2013, have been revised to reflect the correction of the liability for unrecognized tax benefits. See Note 7, "Income Tax" for more details. |
The increase in net working capital from negative $36.8 million at December 31, 2013, to positive $103.0 million at December 31, 2014, is primarily related to an overall increase in cash balances due to additional cash used in the prior year for the repayment of long-term debt obligations in the third quarter of 2013, as further discussed below as well as cash generated by operations. The increase in our cash balances was partially offset by the $379.8 million of net repayments on our commercial paper borrowings, as well as reducing our outstanding borrowings on our amended €100 million revolving credit facility which were both fully repaid in 2014. 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 flows 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.
Cash Flows from Operating activities
Net cash provided by operating activities of $1,272.6 million in 2014, increased by $104.4 million compared to 2013. This increase was primarily due to higher net income, adjusted for increased non-cash add-backs, along with lower cash paid for pension contributions, interest, taxes and restructuring.
Net cash provided by operating activities of $1,168.2 million in 2013, was higher by $184.5 million compared to 2012. This increase was primarily due to higher net income, adjusted for increased 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.
Cash Flows from Investing activities
Net cash used in investing activities of $239.4 million in 2014, decreased by $37.6 million compared to 2013.
• | This decrease was primarily driven by lower net investments in MillerCoors, lower capital expenditures and higher return of capital from unconsolidated affiliates. |
• | Further, proceeds from sales of properties and other assets decreased by $44.8 million 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 in 2013. 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. |
Net cash used in investing activities of $277.0 million in 2013, decreased by $2,358.1 million compared to 2012.
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• | This decrease was primarily driven by the $2,257.4 million used in the Acquisition during the second quarter of 2012. |
• | 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 in 2013. 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. |
Cash Flows from Financing activities
Net cash used in financing activities of $802.0 million in 2014, decreased by $257.2 million compared to 2013.
• | The decrease in cash used in financing activities is primarily related to additional 2013 payments of long-term debt partially offset by additional 2014 net payments on revolving credit facilities and commercial paper. 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. |
Comparatively, during 2014, we released $61.4 million (€44.9 million) of the €500 million convertible note to the Seller. Additionally during 2014, we made net payments of $513.9 million on our revolving credit facilities and commercial paper program compared to proceeds of $507.4 million in 2013. These payments in the current year were primarily driven by reducing the outstanding balances on our commercial paper borrowings and Euro-denominated revolving credit facility to zero. Additionally, we had net borrowings on our European notional cross-border, cross currency cash pool within our Europe business of $74.1 million for 2014. Comparatively, we were not in an overdraft position as of December 31, 2013 or as of December 29, 2012, and thus the net overdraft borrowings was zero in 2013.
• | During 2014 we repaid $65.2 million on our remaining cross currency swaps, which were extended and designated as a net investment hedge in the fourth quarter of 2011, compared to $119.4 million in 2013 |
• | The decrease in cash used in financing activities during 2014, was also offset by a $43.9 million decrease in the proceeds from exercise of stock options, including the related tax impact, as well as a $39.0 million increase in dividends paid. |
Net cash used by 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 versus 2012. |
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, 2014, and December 31, 2013.
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Underlying Free Cash Flow
We generated $956.7 million of underlying free cash flow in 2014. This represents a 7.3% increase in underlying free cash flow compared to $892.0 million in 2013, driven by increased distributions from our investment in MillerCoors, as well as lower cash paid for pension contributions, capital expenditures, interest and taxes, along with higher underlying income, after considering non-cash impairments and other non-cash adjustments. These increases were partially offset by a decreased benefit from changes in net working capital.
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, 2014 | December 31, 2013 | December 29, 2012 | |||||||||||
(In millions) | |||||||||||||
U.S. GAAP: | Net Cash Provided by Operating Activities | $ | 1,272.6 | $ | 1,168.2 | $ | 983.7 | ||||||
Less: | Additions to properties(1) | (259.5 | ) | (293.9 | ) | (222.3 | ) | ||||||
Less: | Investment in MillerCoors(1) | (1,388.1 | ) | (1,186.5 | ) | (1,008.8 | ) | ||||||
Add: | Return of capital from MillerCoors(1) | 1,382.5 | 1,146.0 | 942.4 | |||||||||
Add/(Less): | Cash impact of Special items(2) | (55.8 | ) | 48.8 | 11.6 | ||||||||
Add: | Costs related to the Acquisition(3) | — | 7.7 | 134.7 | |||||||||
Add: | MillerCoors investment in businesses(4) | 1.3 | — | 14.4 | |||||||||
Add: | MillerCoors purchase of noncontrolling interest(4) | — | — | 9.0 | |||||||||
Add: | MillerCoors cash impact of Special items(4) | 3.7 | 1.7 | — | |||||||||
Non-GAAP: | Underlying Free Cash Flow | $ | 956.7 | $ | 892.0 | $ | 864.7 | ||||||
(1) | Included in net cash used in investing activities. |
(2) | Included in net cash provided by operating activities. See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for further discussion. |
(3) | Included in net cash provided by operating activities and reflects acquisition and integration costs paid. |
(4) | Amounts represent our proportionate 42% share of the cash flow impacts. |
Capital Resources
Cash and Cash Equivalents
As of December 31, 2014, we had total cash and cash equivalents of $624.6 million, compared to $442.3 million at December 31, 2013. The increase versus prior year end was driven by the use of a significant amount of cash to repay the debt obligations in 2013 as discussed above. 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 Europe.
Borrowings
The majority of our outstanding borrowings as of December 31, 2014, consisted of fixed-rate senior notes, with maturities ranging from 2015 to 2042, including the CAD 900 million notes due September 2015. During 2014, we entered into interest rate swaps to economically convert our fixed-rate $500 million 3.5% notes due 2022 to floating rate debt. We also hold short-term borrowings primarily related to our overdrafts from our European cash pool and revolving credit facilities. See Part II—Item 8 Financial Statements, Note 13, "Debt" of the Notes for further details.
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. During the third quarter of 2014, we refinanced our existing €150 million revolving credit facility in Europe to provide €100 million on an uncommitted basis through September 2015. We had no outstanding borrowings under the €100 million facility as of December 31, 2014. Additionally, as a result of the refinancing of our $950 million revolving credit facility in the second quarter of 2014, we made a reduction to the size of our existing commercial paper program to a maximum aggregate amount outstanding at any time of $750 million. There were no outstanding borrowings under this revolving credit facility or under our commercial paper program as of December 31, 2014, and thus we had $750
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million available to draw on under this revolving credit facility as of December 31, 2014, as the borrowing capacity is reduced by borrowings under our commercial paper program. We also have Japanese Yen ("JPY") and Euro ("EUR") uncommitted lines of credit, and CAD and British Pound ("GBP") overdraft facilities with several banks should we need additional short-term liquidity.
Additionally, during the second quarter of 2014, we began entering into forward starting interest rate swap agreements to manage our exposure to the volatility of the interest rates associated with future interest payments on a forecasted debt issuance. The forward starting interest rate swaps have an effective date of September 2015 and a termination date of September 2025 mirroring the terms of the forecasted debt issuance. Under the agreements we are required to early terminate these swaps in 2015 at the time we expect to issue the forecasted debt.
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. The covenants specify that our leverage ratio cannot exceed 3.5x debt to EBITDA, as defined in our credit agreement. As of December 31, 2014, and December 31, 2013, 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
As discussed above, during 2014 we released the final principal payments of €44.9 million ($61.4 million at settlement) for amounts withheld on the €500 million convertible note. Additionally during 2014, we had net repayments of $513.9 million on our revolving credit facilities and commercial paper program. As of December 31, 2014, we had no outstanding borrowing on our commercial paper program and no outstanding borrowings on our €100 million revolving credit facility. See Part II—Item 8 Financial Statements and Supplementary Data, Note 13, "Debt" of the Notes for further discussion.
During 2014 we also 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, and therefore, as of December 31, 2014, we do not have any cross currency swap positions outstanding.
As we continue to evaluate opportunities to deleverage, we may consider additional prepayment of our debt.
In 2014, we made contributions to our defined benefit pension plans of $33.6 million. Our U.K. pension plan is subject to a statutory valuation for funding purposes every three years. The most recent valuation as of June 30, 2013, was completed during the first quarter of 2014 and resulted in a long-term funding commitment plan consisting of an MCBC guarantee of a GBP 150 million (approximately $230 million) lump-sum contribution which was paid in January 2015, using a combination of cash from our operations and a portion of the €100 million revolving credit facility, and annual contributions of GBP 24 million to be made from January 2017 through December 2026.
On February 10, 2015, we declared an increased regular quarterly dividend of $0.41 per share, payable March 16, 2015, to Class A and Class B shareholders of record on February 27, 2015. This dividend represents an 11% increase from the most recent quarter’s dividend of $0.37 per share. In addition, Molson Coors Canada Inc. (TSX: TPX.B, TPX.A), declared a quarterly dividend of the Canadian dollar equivalent of $0.41 per share using the February 10, 2015 noon spot exchange rate as reported by the Bank of Canada, payable March 16, 2015, to Class A exchangeable and Class B exchangeable shareholders of record on February 27, 2015.
On February 10, 2015, we announced that our Board of Directors approved and authorized a new program to repurchase up to $1.0 billion of our Class A and Class B common stock with a program term of four years. Concurrent with the announcement of this new program, we terminated our previously existing program that was announced in 2011 for the repurchase of up to $1.2 billion of our Class A and Class B common stock. There were no repurchases under the previously existing program in 2014, 2013 or 2012.
Credit Rating
Our current long-term credit ratings are BBB+/Stable Outlook, Baa2/Stable Outlook, BBB/Stable Outlook and BBB/Stable Outlook with Standard and Poor's, Moody's Investor Services, Fitch Ratings and DBRS, respectively. Similarly, our short-term credit ratings are A-2, Prime-2, F2 and R-2, respectively. 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.
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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. 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. 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, 2014 | December 31, 2013 | December 29, 2012 | ||||||
Weighted-Average Exchange Rate (1 USD equals) | ||||||||
Canadian dollar (CAD) | 1.11 | 1.03 | 1.00 | |||||
Euro (EUR) | 0.75 | 0.77 | 0.80 | |||||
British pound (GBP) | 0.60 | 0.64 | 0.63 | |||||
Czech Koruna (CZK) | 20.67 | 19.60 | 19.82 | |||||
Croatian Kuna (HRK) | 5.58 | 5.70 | 5.96 | |||||
Serbian Dinar (RSD) | 84.82 | 85.24 | 89.97 | |||||
New Romanian Leu (RON) | 3.33 | 3.31 | 3.55 | |||||
Bulgarian Lev (BGN) | 1.46 | 1.48 | 1.57 | |||||
Hungarian Forint (HUF) | 228.63 | 223.91 | 227.11 | |||||
As of | |||||
December 31, 2014 | December 31, 2013 | ||||
Closing Exchange Rate (1 USD equals) | |||||
Canadian dollar (CAD) | 1.16 | 1.06 | |||
Euro (EUR) | 0.83 | 0.73 | |||
British pound (GBP) | 0.64 | 0.60 | |||
Czech Koruna (CZK) | 22.86 | 19.89 | |||
Croatian Kuna (HRK) | 6.33 | 5.54 | |||
Serbian Dinar (RSD) | 100.30 | 83.40 | |||
New Romanian Leu (RON) | 3.70 | 3.25 | |||
Bulgarian Lev (BGN) | 1.62 | 1.42 | |||
Hungarian Forint (HUF) | 261.64 | 216.26 | |||
The exchange rates for the years ended December 31, 2014, December 31, 2013, and December 29, 2012, 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.
Foreign currencies in the countries in which we operate, specifically the CAD, EUR, CZK, HRK and RSD, have devalued significantly over the last few months. If these rates are maintained at similar levels throughout 2015, then the impact on USD reported earnings may be material.
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Capital Expenditures
In 2014, we incurred $291.3 million, and paid $259.5 million, on capital improvement projects worldwide, which excludes capital spending by MillerCoors and other equity method joint ventures, representing a 2% decrease versus 2013 capital expenditures incurred of $296.8 million. We expect to incur capital expenditures in 2015 of approximately $330 million, excluding MillerCoors and other equity method joint ventures. The increase in planned expenditures from 2014 is primarily due to planned supply chain capital projects in Canada and keg purchases in Europe. We have increased our focus on where and how we employ our planned capital expenditures, specifically strengthening our focus on required returns on invested capital as we determine how to best allocate cash within the business.
Contractual Obligations and Commercial Commitments
Contractual Obligations
A summary of our consolidated contractual obligations as of December 31, 2014, and based on foreign exchange rates at December 31, 2014, is as follows:
Payments due by period | ||||||||||||||||||||
Total | 2015 | 2016 - 2017 | 2018 - 2019 | |||||||||||||||||