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 29, 2012 | |
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 29, 2012, was $6,037,690,186 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 29, 2012, 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 15, 2013:
Class A Common Stock—2,556,894 shares | Class B Common Stock—156,773,354 shares | |
Exchangeable shares:
As of February 15, 2013, the following number of exchangeable shares was outstanding for Molson Coors Canada, Inc.:
Class A Exchangeable Shares—2,896,943 shares | Class B Exchangeable Shares—19,246,210 shares | |
These Class A and Class B exchangeable shares offer substantially the same economic and voting rights as the respective classes of common shares of the registrant. This is achieved via the following structure: The registrant has outstanding one share each of special Class A and Class B voting stock, through which the holders of Class A exchangeable shares and Class B exchangeable shares of Molson Coors Canada Inc. (a subsidiary of the registrant), respectively, may exercise their voting rights with respect to the registrant. The special Class A and Class B voting stock are entitled to one vote for each of the exchangeable shares, respectively, excluding shares held by the registrant or its subsidiaries, and generally vote together with the Class A common stock and Class B common stock, respectively, on all matters on which the Class A common stock and Class B common stock are entitled to vote. The trustee holder of the special Class A voting stock and the special Class B voting stock has the right to cast a number of votes equal to the number of then outstanding Class A exchangeable shares and Class B exchangeable shares, respectively.
Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement for the registrant's 2013 annual meeting of stockholders, which will be filed no later than 120 days after the close of the registrant's fiscal year ended December 29, 2012, 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 2013" 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," "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 under the heading "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.
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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 subsidiaries. On June 15, 2012, we completed our acquisition (the "Acquisition") of StarBev Holdings S.a.r.l. ("StarBev"), which we subsequently renamed Molson Coors Central Europe ("MCCE"), operating in Central Europe (which includes Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina and Slovakia). Our other subsidiaries include: Molson Coors Canada ("MCC"), operating in Canada; MillerCoors LLC ("MillerCoors"), which is accounted for by us under the equity method of accounting, operating in the United States ("U.S."); Molson Coors Brewing Company (UK) Limited ("MCBC-UK"), operating in the United Kingdom ("U.K.") and the Republic of Ireland; Molson Coors International ("MCI") operating in various other countries; and our other non-operating subsidiaries. Any reference to "Coors" means the Adolph Coors Company prior to the 2005 merger with Molson Inc. (the "Merger"). Any reference to Molson Inc. or Molson means MCC prior to the Merger. Any reference to "Molson Coors" means MCBC after the Merger.
Unless otherwise indicated, information in this report is presented in U.S. dollars ("USD" or "$").
Background
We are one of the world's largest brewers and have a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian, Carling and Staropramen, as well as craft and specialty beers such as Blue Moon, Creemore Springs, Cobra and Doom Bar. For more than 350 combined years, we have been brewing, innovating and delighting the world's beer drinkers. Our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
Molson and Coors were founded in 1786 and 1873, respectively. Our commitment to producing the highest quality beers is a key part of our heritage and remains so to this day. Our brands are designed to appeal to a wide range of consumer tastes, styles and price preferences. Our largest markets are Canada, the U.S. and Europe.
Coors was incorporated in June 1913 under the laws of the state of Colorado. In August 2003, Coors changed its state of incorporation to the state of Delaware. In February 2005, upon completion of the Merger, Coors changed its name to Molson Coors Brewing Company.
Our Segments
In 2012, we operated the following segments: Canada, the U.S., Central Europe, the U.K., and MCI. The U.K. and Central Europe segments will be shown as a single European segment, named Molson Coors Europe, effective the beginning of fiscal year 2013. A separate operating team manages each segment and each segment manufactures, markets, and sells beer and other beverage products.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 4 "Segment Reporting" of the Notes to the Consolidated Financial Statements ("Notes") for information relating to our segments and operations, including financial and geographic information. For certain risks attendant to our foreign operations, refer to Part I—Item 1A, "Risk Factors" and the discussions regarding our Canada, Central Europe, U.K. and MCI segments.
Our Products
We have a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian, Carling and Staropramen, which are positioned to meet a wide range of consumer segments and occasions in a variety of markets.
Brands sold in Canada include Coors Light, Molson Canadian, Molson Export, Molson Canadian 67, Coors Light Iced T, Molson Dry, Molson M, the Rickard's family of brands, Carling, Carling Black Label, Pilsner, Keystone, Creemore Springs, the Granville Island brands, Caffrey's, Cobra, and a number of other regional brands. We also brew or distribute under license the following brands: Heineken, Amstel Light, Murphy's, Newcastle Brown Ale and Strongbow cider under license from Heineken N.V. ("Heineken"), and Miller Lite, Miller Genuine Draft, Miller Chill, Milwaukee's Best, and Milwaukee's Best Dry under license from SABMiller plc ("SABMiller"). In 2012, we continued to brew the Foster's brand under license from Foster's Group Limited ("Foster's") although this license was terminated in December 2012. We are also party to a joint venture with Grupo Modelo S.A.B. de C.V. ("Modelo") that imports, distributes and markets the Modelo beer brand portfolio, including the Corona, Coronita, Negra Modelo, and Pacifico brands, across all Canadian provinces and territories. In Canada, we also have
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contract brewing agreements to produce for the U.S. market Asahi and Asahi Select for Asahi Breweries, Ltd. and Labatt Blue and Labatt Blue Light for North American Breweries, Inc.
MillerCoors sells a wide variety of brands in the U.S. In the formation of the MillerCoors joint venture, MCBC and SABMiller each assigned the United States and Puerto Rican ownership rights to its respective legacy brands to MillerCoors, but retained all ownership of these brands outside the United States and Puerto Rico. MillerCoors' flagship premium light brands are Coors Light, Miller Lite and Miller64. Brands in the domestic premium segment include Coors Banquet and Miller Genuine Draft. Brands in the below premium segment include Miller High Life, Keystone, Icehouse, Mickey's, Milwaukee's Best, Hamm's, and Old English 800 brands. MillerCoors also brews or distributes under license the Molson and Foster's brands and George Killian's Irish Red. Craft and import brands, marketed and sold through Tenth and Blake, include the Blue Moon brands, Henry Weinhard's brands, Leinenkugel's brands, Peroni Nastro Azzurro, Pilsner Urquell, Batch 19, Grolsch, Worthington's, St. Stefanus and cider brands from the Crispin Cider Company. Brands in the non-alcoholic segment include Coors Non-Alcoholic and Sharp's.
Brands sold in Central Europe include Staropramen, Branik, Ostravar, Ozujsko, Borsodi, Kamenitza, Astika, Jelen, Niksicko, Bergenbier, Noroc and Apatinsko as well as other regional brands. The Central European business has licensing agreements with various other brewers through which it also brews or distributes the Stella Artois, Hoegaarden, Leffe, Beck's, Lowenbrau, Spaten, Löwenweisse and Belle-Vue Kriek brands in certain central European countries.
Brands sold in the U.K. and Ireland include: Carling, Carling Zest, Coors Light, Worthington's, White Shield, Red Shield, Caffrey's, Sharp's Doom Bar, and Blue Moon, as well as a number of smaller regional ale brands. We also sell the Grolsch brands through a joint venture with Royal Grolsch N.V. and the Cobra brands through a joint venture called Cobra Beer Partnership Ltd., and are the exclusive distributor for several brands which are sold under license, including Corona, Coronita, Negra Modelo, Pacifico, and Singha. Additionally, in order to be able to provide a full line of beer and other beverages to our U.K. on-premise customers, we sell "factored" brands, which are third-party beverage brands for which we provide distribution to retail, typically on a non-exclusive basis.
MCI also markets and sells several of our brands in its international markets. Brands unique to these international markets include Zima, Iceberg brands, Coors Gold, and Coors Extra.
Canada Segment
We are Canada's second-largest brewer by volume and North America's oldest beer company. Our approximate market share of the Canada beer market in 2012 was 39%. We brew, market, sell and distribute a wide variety of beer brands nationally. Our portfolio has leading brands in all major product and price segments. Our focus and investment is on key owned brands, including Coors Light, Molson Canadian, Carling, Molson Dry, Molson Export, Rickard's, Pilsner, Creemore Springs and Granville Island and strategic distribution partnerships, including those with Heineken, Modelo and SABMiller. In 2012, Coors Light had an approximate 14% market share and was the top selling beer brand in Canada, and Molson Canadian had an approximate 8% market share and was the third top selling beer in Canada.
The Canada segment also includes our partnership arrangements related to the distribution of beer in Ontario, Brewers' Retail Inc. ("BRI"), and in the Western provinces, Brewers' Distributor Ltd. ("BDL"). BRI and BDL are accounted for under the equity method of accounting.
Sales and Distribution
In Canada, provincial governments regulate the beer industry, particularly with regard to the pricing, mark-up, container management, sale, distribution, and advertising of beer. Distribution and the retail sale of alcohol products involve a wide range and varied degree of Canadian government control through their respective provincial liquor boards.
Province of Ontario
In Ontario, beer may only be purchased at retail outlets operated by BRI, at government-regulated retail outlets operated by the Liquor Control Board of Ontario, at approved agents of the Liquor Control Board of Ontario, or at any bar, restaurant, or tavern licensed by the Liquor Control Board of Ontario to sell liquor for on-premise consumption. We, together with certain other brewers, participate in the ownership of BRI in proportion to provincial market share relative to other brewers in the ownership group. Brewers may deliver directly to BRI's outlets or may choose to use BRI's distribution centers to access retail stores in Ontario, the Liquor Control Board of Ontario system and licensed establishments.
Province of Québec
In Québec, beer is distributed to retail outlets directly by each brewer or through independent agents. We are the agent for the licensed brands we distribute. The brewer or agent distributes the products to permit holders for retail sales for on-premise
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consumption. Québec retail sales for off-premise consumption are made through grocery and convenience stores as well as government operated outlets.
Province of British Columbia
In British Columbia, the government's Liquor Distribution Branch controls the regulatory elements of distribution of all alcohol products in the province. BDL, which we co-own with a competitor, manages the distribution of our products throughout British Columbia. Consumers can purchase beer at any Liquor Distribution Branch retail outlet, at any independently owned and licensed retail store or at any licensed establishment for on-premise consumption. Establishments licensed primarily for on-premise liquor sales may also be licensed for off-premise consumption.
Province of Alberta
In Alberta, the distribution of beer is managed by independent private warehousing and shipping companies or by a government sponsored system in the case of U.S. sourced products. All sales of liquor in Alberta are made through retail outlets licensed by the Alberta Gaming and Liquor Commission or licensees, such as bars, hotels and restaurants. BDL manages the distribution of our products in Alberta.
Other Provinces
Our products are distributed in the provinces of Manitoba and Saskatchewan through local liquor boards. Manitoba and Saskatchewan also have licensed private retailers. BDL manages the distribution of our products in Manitoba and Saskatchewan. In the Maritime Provinces (other than Newfoundland), local liquor boards distribute and sell our products. In Yukon, Northwest Territories and Nunavut, government liquor commissioners manage the distribution and sale of our products.
Manufacturing, Production and Packaging
Brewing Raw Materials
We select global suppliers in order to procure the highest quality materials and services at the lowest prices available. We also use hedging instruments to mitigate the risk of volatility in certain commodities and foreign exchange markets.
We source barley malt from one primary provider. Hops are purchased from a variety of global suppliers in the U.S., Europe, and New Zealand. Other starch brewing adjuncts are sourced from two main suppliers, both in North America. We do not foresee any significant risk of disruption in the supply of these agricultural products. Water used in the brewing process is from local sources in the communities where our breweries operate. We do not anticipate future difficulties in accessing water or agricultural products.
Brewing and Packaging Facilities
We operate seven breweries, strategically located throughout Canada, which 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 2014. We source cans and lids from two primary providers and are currently negotiating long-term contracts with each. We currently utilize a hedging program for aluminum requirements in Canada. We do not expect any future difficulties in accessing glass bottles or aluminum cans. The distribution systems in each province generally provide the collection network for returnable bottles and aluminum cans. The standard container for beer brewed in Canada is the 341 ml returnable bottle, which in 2012 represented a significant majority of the approximately 47% of volume sales in Canada in bottles. In 2012, aluminum cans accounted for approximately 42% of our volume sales in Canada. In 2012, we sold approximately 11% of our beer volume in stainless steel kegs. A limited number of kegs are purchased every year, and we have no long-term supply commitment. Crowns, labels, corrugate, and paperboard are purchased from a small number of sources unique to each product. We do not foresee difficulties in accessing these packaging products in the near future.
Contract Manufacturing
We have an agreement with North American Breweries, Inc. to brew, package and ship Labatt trademark brands to the U.S. market through 2016.
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Seasonality of Business
Consumption of beer in Canada is seasonal. In 2012, approximately 40% of our sales volume occurred during the four months from May through August, which is consistent with our historical results.
Known Trends and Competitive Conditions
2012 Canada Beer Industry Overview
The Canadian brewing industry is a mature market. It is characterized by aggressive competition for volume and market share from regional brewers, microbrewers and certain foreign brewers, as well as our main domestic competitor. These competitive pressures require significant annual investment in marketing and selling activities.
There are three major beer price segments: above premium, which includes most imports; premium, which includes the majority of domestic brands and the light sub-segment; and value (below premium).
Since 2001, the premium beer segment in Canada has gradually lost volume to the above premium and value segments. From 2003 to 2008, Canada beer industry shipments annual average growth rate approximated 1%. For each of 2009 and 2010, there were slight declines, and for each of 2011 and 2012, there were approximate declines of 2% in Canada beer industry shipments.
Our Competitive Position
Our brands compete with competitor beer brands and other alcohol beverages, including wine and spirits, and thus our competitive position is affected by consumer preferences between and among these other categories. Our brand portfolio gives us strong representation in all major beer segments.
The Canada brewing industry is composed principally of two major brewers, MCBC, which had approximately 39% of the market share in 2012, and Anheuser-Busch InBev ("ABI"), which had approximately 42% of the market share in 2012. In 2012, the Ontario and Québec markets accounted for approximately 61% of the total beer market in Canada.
Regulation
In Canada, provincial governments regulate the production, marketing, distribution, selling, and pricing of beer (including the establishment of minimum prices), and impose commodity taxes and license fees in relation to the production and sale of beer. During November 2012, an increase in beer excise taxes of over 20% was announced and affected in Québec. In addition, the federal government regulates the advertising, labeling, quality control, and international trade of beer, and also imposes commodity taxes, consumption taxes, excise taxes, and in certain instances, custom duties on imported beer. In 2012, our Canada excise taxes totaled $638.4 million or approximately $75 per hectoliter sold. Further, certain bilateral and multilateral treaties entered into by the federal government, provincial governments and certain foreign governments, especially with the United States, affect the Canadian beer industry.
United States Segment
MillerCoors is the nation's second largest brewer by volume, selling approximately 29% of the total 2012 U.S. brewing industry shipments (excluding exports and U.S. shipments of imports). MillerCoors was formed on July 1, 2008 as a joint venture between MCBC and SABMiller. Each party contributed its U.S. and Puerto Rico businesses and related operating assets and certain liabilities. The percentage interests in the profits of MillerCoors are 58% for SABMiller and 42% for MCBC. Voting interests are shared 50%-50%, and MCBC and SABMiller have equal board representation within MillerCoors. MCBC and SABMiller each agreed not to transfer its economic or voting interests in MillerCoors for a period commencing on the date of combination and expiring on July 1, 2013, and certain rights of first refusal apply to any subsequent assignment. 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 United States and its territories, and its U.S. operating segment included the results of the Rocky Mountain Metal Container ("RMMC") and Rocky Mountain Bottle Container ("RMBC") joint ventures. Effective July 1, 2008, MCBC's equity investment in MillerCoors represents our U.S. operating segment.
Sales and Distribution
In the United States, beer is generally distributed through a three-tier system consisting of manufacturers, distributors and retailers. A national network of approximately 450 independent distributors purchases MillerCoors' products and distributes them to retail accounts. In 2012, approximately 18% was sold on-premise in bars and restaurants, and the other 82% was sold
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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 2012.
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 has water rights to provide for and to sustain brewing operations in case of a prolonged drought in the regions for which it has operations. MillerCoors does not anticipate future difficulties in accessing water or agricultural products.
Brewing and Packaging Facilities
There are eight major breweries/packaging facilities which produce MillerCoors products. MillerCoors imports Molson brands and Worthington's from MCBC and Peroni Nastro Azzurro, Pilsner Urquell, Grolsch, and other import brands from SABMiller.
Packaging Materials
Over half of U.S. products sold were packaged in aluminum cans in 2012. A portion of aluminum cans were purchased from RMMC, a joint venture between MillerCoors and Ball Corporation ("Ball"), whose production facilities are located near the brewery in Golden, Colorado. In addition to the supply agreement with RMMC, MillerCoors has a commercial supply agreement with Ball to purchase cans and ends in excess of what is supplied through RMMC; these agreements have various expiration dates. In 2011, MillerCoors signed a 10-year contract extension with Ball to extend the RMMC joint venture agreement along with the commercial can and end purchase agreements. Approximately one-third of U.S. products sold in 2012 were packaged in glass bottles of which a portion was provided by RMBC, a joint venture between MillerCoors and Owens-Brockway Glass Container, Inc ("Owens"). The joint venture with Owens, as well as a supply agreement with Owens for the glass bottles required in excess of RMBC's production, expires in 2015. The approximate remaining 10% of U.S. production volume sold in 2012 was packaged in half, quarter, and one-sixth barrel stainless steel kegs. A limited number of kegs are purchased each year, and there is no long-term supply agreement. Crowns, labels, corrugate and paperboard are purchased from a small number of sources unique to each product. MillerCoors does not foresee difficulties in accessing packaging products in the near future.
Contract Manufacturing
MillerCoors has an agreement to brew, package and ship products for Pabst Brewing Company through June 2020. Additionally, MillerCoors produces beer under contract for our MCI segment and SABMiller.
Seasonality of the Business
MillerCoors U.S. sales volumes are normally lowest in the winter months (first and fourth quarters) and highest in the summer months (second and third quarters).
Known Trends and Competitive Conditions
2012 U.S. Beer Industry Overview
The beer industry in the United States is highly competitive, and the two largest brewers, ABI and MillerCoors together represented approximately 77% of the market in 2012. The formation of MillerCoors in 2008 created a stronger U.S. presence for MCBC with the scale, operational efficiency and distribution platform to compete more effectively in the U.S. market place. Growing or even maintaining market share has required significant investments in marketing. From 1998 to 2008, the U.S. beer industry shipments annual growth rate approximated 1%, compared with declines ranging from 1% to 2% in each of the years 2009, 2010 and 2011. In 2012, industry volumes improved, with estimated overall growth of 1% to 2%.
The 2009 to 2011 decline in the U.S. beer industry has been partially attributed to relatively poor economic conditions. High rates of unemployment and lower consumer confidence have negatively affected the legal age key beer drinkers' purchasing behaviors.
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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, but also competes with imported and craft beer brands. MillerCoors is the nation's second largest brewer by volume, selling approximately 29% of the total 2012 U.S. brewing industry shipments (including exports and U.S. shipments of imports). This compares to ABI's estimated market share of 48%.
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 beers 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. U.S. federal excise taxes on malt beverages approximated $15 per hectoliter in 2012. State excise taxes are levied in specific states at varying rates.
Central Europe Segment
As a result of our Acquisition of StarBev, we are Central Europe's third largest brewer by volume with an approximate 22% market share in 2012. The majority of sales are in Czech Republic, Serbia, Romania, Bulgaria, Croatia and Hungary. Our portfolio includes beers that have the largest share in their respective countries, such as Jelen in Serbia and Ozujsko in Croatia. We have beers that rank in the top four in market share in countries throughout the region, including Staropramen, Bergenbier, Kamenitza and Borsodi. We also brew and distribute Stella Artois, Beck's, Lowenbrau and Spaten under license agreements with ABI companies.
Sales and Distribution
In Central Europe, beer is generally distributed through a three-tier system consisting of manufacturers, distributors and retailers, except for on-premise sales in Czech Republic and to certain key international accounts for which we sell directly to retailers.
Off-Premise Channel
The off-premise channel includes sales to supermarkets, convenience stores, liquor stores, distributors, and wholesalers. The off-premise channel accounted for approximately 70% of our Central Europe sales volume in 2012, of which approximately 36% consisted of sales made through wholesalers to smaller outlets (which is referred to as "traditional off-trade") and approximately 34% consisted of direct sales to large retailers (which is referred to as "modern off-trade").
On-Premise Channel
The on-premise channel accounted for approximately 30% of our Central Europe sales volume in 2012. 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.
Distribution
Distribution activities for both the on-premise and off-premise channels are conducted primarily by third-party logistics providers, of which there are several hundred operating across the Central European business. We also conduct a small amount of secondary distribution in Czech Republic utilizing our own fleet of vehicles.
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Manufacturing, Production and Packaging
Brewing Raw Materials
We have entered into long term contracts with two suppliers for most of our required malt for 2012. These contracts are with Boortmalt and Malteries Soufflet and expire in December 2015 and December 2020, respectively. The remaining 20% was acquired from various malt suppliers in the region. Hops are purchased under various contracts with German suppliers, which cover our anticipated needs through June 2014, and adjuncts are purchased under various contracts with local producers, which cover 80% of our needs for 2013. Water used in the brewing process is sourced through water rights and supply contracts. We do not anticipate future difficulties in accessing required water or agricultural products.
Brewing and Packaging Facilities
We operate nine breweries in Central Europe, which brew and package all owned brands sold in Central Europe. See Item 2, "Properties" for further detail.
Packaging Materials
Returnable bottles represented a significant majority of the approximately 46% of bottle volume sales in Central Europe in 2012. We have contracts with two primary providers for returnable bottles. Approximately 27% of our Central Europe volume sales in 2012 consisted of products packaged in recyclable plastic containers for which we have one year agreements with various manufacturers in the region. Approximately 15% of our Central Europe volume sales in 2012 consisted of products packaged in cans, of which 95% were aluminum and 5% were steel. We have long term contracts with three providers for our required supply of cans. The remaining amount of our Central Europe volume sales in 2012 consisted of products packaged in returnable kegs. A limited number of steel kegs are purchased each year, and we are currently negotiating a long-term supply agreement for our steel keg requirements. Crowns, labels and corrugate are purchased from a small number of sources. We do not foresee difficulties in accessing these or other packaging materials in the near future.
Seasonality of Business
In Central Europe, the beer industry is subject to seasonal sales fluctuations primarily influenced by holidays, weather and major televised sporting events. Peak selling seasons typically occur during the summer and during the Christmas and New Year holidays.
Known Trends and Competitive Conditions
2012 Central Europe Beer Industry Overview
The Central Europe beer market grew volume by approximately 1% in 2012, with volumes shifting from the higher margin on-premise channel to the lower margin off-premise channel. Since 2008, the off-premise market share has increased from 65% to 67% of total volume, and the on-premise market share has declined from 35% to 33%. Central Europe beer industry shipments have increased by approximately 1% in each of 2011 and 2012 after declines of approximately 10% in 2009 and approximately 5% in 2010.
Our Competitive Position
Our principal competitors are SABMiller, Heineken, and Carlsberg Group ("Carlsberg"), with estimated regional market shares in 2012 of approximately 27%, 26%, and 8%, respectively, compared to our share of 22%.
Regulation
Each country that is part of our Central Europe segment is either a member of the European Union or a current candidate to join, and, as such, there are similarities in the regulations that apply to many parts of our Central Europe segment's operations and products, including brewing, food safety, labeling and packaging, marketing and advertising, environmental, health and safety, employment and data protection regulations. To operate breweries and conduct our business in Central 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, and all countries, with the exception of Serbia, use similar measurements based on alcohol by volume or Plato degrees. Currently, Serbia uses a flat excise per hectoliter but is moving toward alignment with the other countries. In 2012, the excise taxes for our Central Europe segment totaled $131.5 million, or approximately $17 per hectoliter.
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United Kingdom Segment
We are the United Kingdom's second-largest brewer by volume, with an approximate 18% share (excluding factored products) of the U.K. beer market in 2012. Sales are primarily in England and Wales, with Carling representing more than two-thirds of our total U.K. segment beer volume. The U.K. segment consists of our production and sale of the MCBC brands in the U.K. and the Republic of Ireland, our joint venture arrangements for the production and distribution of Grolsch and Cobra brands in the U.K. and the Republic of Ireland, factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by us), and our Tradeteam joint venture arrangement with DHL (formerly Exel Logistics) for the distribution of products throughout the U.K. Tradeteam is accounted for under the equity method of accounting. Additionally, we distribute the Modelo brands, including Corona, pursuant to a distribution agreement with Modelo.
Sales and Distribution
In the U.K., beer is generally distributed through a two-tier system consisting of manufacturers and retailers. Most of our beer in the U.K. is sold directly to retailers. It is also common in the U.K. for brewers to distribute beer, wine, spirits, and other products owned and produced by other companies to the on-premise channel (bars and restaurants). Approximately 20% of our U.K. segment net sales in 2012 represented factored brands. Factored brand sales are included in our net sales and cost of goods, but are not included in our reported volumes.
Generally, over the past three decades, volumes 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.
On-Premise Channel
The on-premise channel accounted for approximately 64% of our U.K. sales volumes in 2012. The on-premise channel has two sub-categories: multiple on-premise and independent on-premise. Multiple on-premise refers to those customers who own a number of pubs and restaurants and independent on-premise refers to individual owner-operators of pubs and restaurants.
In 2012, approximately 47% and 53% of our on-premise volume sales were made to multiple (including national wholesalers) and independent on-premise customers, respectively. In recent years, pricing competition in the on-premise channel has intensified as the retail pub chains have consolidated. As a result, the larger pub chains have been able to negotiate lower beer prices from brewers. The installation and maintenance of draught beer dispensing equipment in the on-premise channel is generally the responsibility of the brewer. Accordingly, we own equipment used to dispense beer from kegs to consumers. This includes beer lines, cooling equipment, taps, and counter mounts.
Similar to other U.K. brewers, we utilize loans in securing supply relationships with customers in the on-premise market. Loans are normally granted at below-market rates of interest, with the outlet purchasing beer at lower-than-average discount levels to compensate. We reclassify a portion of sales revenue to interest income to reflect the economic substance of these loans. See Part II—Item 8 Financial Statements and Supplementary Data, Note 1 "Basis of Presentation and Summary of Significant Accounting Policies" of the Notes for further discussion.
Off-Premise Channel
The off-premise channel accounted for approximately 36% of our U.K. sales volume in 2012. The off-premise channel includes direct sales to supermarkets, convenience stores, liquor stores, distributors, and wholesalers. The off-premise channel has become increasingly concentrated among a small number of super-store chains, placing increasing downward pressure on beer pricing.
Distribution
Distribution activities for both the on- and off-premise channels are conducted by Tradeteam, which operates a system of satellite warehouses and a transportation fleet.
Manufacturing, Production and Packaging
Brewing Raw Materials
We use the highest quality water, barley and hops to brew our products. During 2012, we produced 100% of our required malt using U.K. sourced barley. Hops and adjuncts used in the brewing process are purchased from agricultural sources in the U.K., U.S. and on the European continent. Water used in the brewing process is sourced from various wells that have sufficient recharge capacity for assumed production. We do not anticipate future difficulties in accessing water or agricultural products.
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Brewing and Packaging Facilities
We operate four breweries in the U.K which brew and package all owned brands sold in the U.K. and the Republic of Ireland with the exception of Coors Light, which is contract brewed in the Republic of Ireland. See "Contract Manufacturing" and Item 2, "Properties" for further detail.
Packaging Materials
We used kegs and casks for approximately 59% of the U.K. products sold in 2012, reflecting a high percentage of product sold on-premise. Approximately 33% of our U.K. products sold in 2012 were packaged in steel cans with aluminum ends. All of our cans are purchased through a supply contract with Ball. Approximately 8% of the U.K. products sold in 2012 were packaged in glass bottles purchased through supply contracts with third-party suppliers. Crowns, labels, corrugate, and paperboard are purchased from sources unique to each product. We do not foresee difficulties in accessing these or other packaging materials in the near future.
Contract Manufacturing
We have a contract brewing and kegging agreement with Heineken for the Foster's and Kronenbourg brands. We also have an agreement with Heineken whereby it will brew and package certain of our products for sale in the Republic of Ireland through December 2014. In addition, we have a multi-year agreement to contract brew ales for Carlsberg which began in 2011.
Seasonality of Business
In the U.K., the beer industry is subject to seasonal sales fluctuations primarily influenced by holidays, weather and by certain major televised sporting events. Peak selling seasons occur during the summer and during the Christmas and New Year holidays.
Known Trends and Competitive Conditions
2012 U.K. Beer Industry Overview
Sales in the U.K. beer market in 2012 declined by 5.1%, with on-premise sales declining 5.0% and off-premise sales decreasing 5.1%, impacted by poor summer weather and weak economic conditions. Despite a widening price differential between the on-premise (higher prices) and the off-premise (lower prices) channels, volumes in both channels declined in 2012. The recession has accelerated this downward trend. From 1997 through 2007, U.K. beer industry shipments declined at an average rate of 1% to 2% per year, compared to annual declines of approximately 4% from 2008 to 2012.
While the industry has experienced a general trend away from ales and toward lagers, volume sales of premium bottled ales grew in the off-premise channel in 2012. Sales of lagers accounted for 74% of the total volume sales in the U.K. market in 2012.
Our Competitive Position
Our beers compete not only with similar products from competitors, but also with other alcohol beverages, including wines, spirits, and ciders. With the exception of stout, where we do not have our own brand, we believe our brand portfolio gives us strong representation in all major beer categories. Carling was the number-one beer brand in the U.K. in 2012, and Coors Light is one of the fastest growing major brands. We believe the Corona, Cobra and Grolsch brands position us well to take advantage of the growth in more premium world beers alongside our portfolio of imported and specialty beer brands, such as Singha and Blue Moon. In addition, Doom Bar is one of the fastest growing brands in the craft segment.
Our principal competitors are Heineken, ABI, and Carlsberg, with market shares in 2012 of approximately 24%, 17%, and 14%, respectively, compared to our market share of 18%.
Regulation
U.K. regulations apply to many parts of our operations and products, including brewing, food safety, labeling and packaging, marketing and advertising, environmental, health and safety, employment, and data protection regulations. To operate our breweries and carry on business in the U.K., we must obtain and maintain numerous permits and licenses from local Licensing Justices and governmental bodies, including Her Majesty's Revenue & Customs; the Office of Fair Trading; the Data Protection Commissioner and the Environment Agency.
The U.K. government levies excise taxes on all alcohol beverages at varying rates depending on the type of product and its alcohol content by volume. In 2012, our excise taxes totaled $904.6 million, or $108 per hectoliter. In 2010, the U.K. government announced that alcohol excise tax rates will increase at a rate of 2% above U.K. inflation annually through 2015.
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Molson Coors International Segment
The objective of MCI is to grow and expand our business and brand portfolios in our non-core and emerging markets, which includes Asia, continental Europe (excluding Central Europe, as it is a part of the Central Europe segment), Mexico, Latin America and the Caribbean (excluding Puerto Rico, as it is a part of the U.S. segment).
Asia
The MCI Asia region is primarily composed of businesses in India, Japan and China. Our joint venture in India gives us a 51% share and operational control of Molson Coors Cobra India ("MC Cobra India"). MC Cobra India produces, sells and markets a beer portfolio consisting of King Cobra, Cobra and Iceberg's 9000. The results of MC Cobra India are consolidated in our financial statements. The Japan business is focused on the Zima, Coors Light and Modelo brands. Our China business is focused on growing Coors Light and other brands. During the third quarter of 2012, we deconsolidated our 51% ownership in our joint venture in China, Molson Coors Si'hai ("MC Si'hai"), from our financial statements due to a loss of our ability to control the joint venture.
Europe
Our Central Europe export and license business was added to MCI as part of the Acquisition and is primarily focused on Staropramen. This includes the licensing arrangements with ABI to brew and distribute our products in Russia and Ukraine, export arrangements with Carlsberg in the U.K. and Sweden and with ABI in Germany, Canada and Italy, and other export arrangements in various other countries. Our other businesses within continental Europe are focused on growing Carling, Coors Light and Cobra. These products are brewed by and exported from our U.K. breweries to portions of continental Europe. We also have various licensing agreements for the manufacturing and distribution of our products, primarily in Ukraine, Spain and Russia.
Mexico, Latin America, the Caribbean, and Other
Coors Light is sold in Mexico through an exclusive licensing agreement with Heineken. In the Caribbean and Latin America, our products are produced under a brewing agreement with MillerCoors and are exported to and sold through agreements with independent distributors.
Corporate
Corporate includes interest and certain other general and administrative costs that are not allocated to any of the operating segments. The majority of these corporate costs relate to worldwide administrative functions, such as corporate affairs, legal, human resources, finance and accounting, treasury, insurance and risk management. Additionally, the results of our water resources and energy operations in Colorado are included in Corporate. Corporate also includes certain royalty income and administrative costs related to the management of intellectual property.
Other Information
Global Intellectual Property
We own trademarks on the majority of the brands we produce and have licenses for the remainder. We also hold several patent and design registrations with expiration dates through 2049 relating to beer dispensing systems, packaging and certain other innovations. We are not reliant on patent royalties for our financial success. Therefore, these expirations are not expected to have a significant impact on our business.
Corporate Responsibility
Our corporate responsibility is integral to our business strategy. We are committed to sustainable growth while improving the impact we have on our communities, people and the environment. In 2012, we were named Global Beverage Sector Leader on the Dow Jones Sustainability World Index. We were listed on the Dow Jones Sustainability North America Index in 2011.
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
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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 20 "Commitments and Contingencies" of the Notes under the caption "Environmental" for additional information regarding environmental matters.
Employees
We have approximately 2,700 full-time employees in our Canada segment, of which 60% are represented by trade unions. We maintain agreements with the various unions representing workers at each of our facilities. MillerCoors has approximately 8,900 employees, of which 35% are represented by unions. Additionally, we have approximately 4,300 employees in our Central Europe segment within Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina and Slovakia and we have approximately 2,200 employees in our U.K. segment, of which 25% of the U.K. total workforce is represented by trade unions. Furthermore, we have approximately 400 employees in our MCI business in 16 countries, primarily in Asia (India, Japan and China) and within our Denver headquarters office. Finally, we have approximately 200 employees in our corporate headquarters in Denver, Colorado.
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
Our internet website is http://www.molsoncoors.com. Through a direct link to our reports at the SEC's website at http://www.sec.gov, we make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this report.
Executive Officers
The following tables set forth certain information regarding our executive officers as of February 15, 2013:
Name | Age | Position | ||
Peter Swinburn | 60 | President, Chief Executive Officer, and a Director of MillerCoors LLC | ||
Krishnan Anand | 55 | President and Chief Executive Officer of Molson Coors International | ||
Peter H. Coors | 66 | Vice Chairman of the Board of the Company, Executive Director of Coors Brewing Company, and Chairman of the Board of MillerCoors LLC | ||
Stewart Glendinning | 47 | President and Chief Executive Officer of Molson Coors Canada and a Director of MillerCoors LLC | ||
Gavin Hattersley | 50 | Chief Financial Officer and a Director of MillerCoors LLC | ||
Mark Hunter | 50 | President and Chief Executive Officer of Molson Coors Europe | ||
Celso White | 51 | Chief Supply Chain Officer | ||
Samuel D. Walker | 54 | 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 occur, it may have a material adverse effect on our business, results of operations and prospects.
Risks Specific to Our Company
Competition in our markets could require us to reduce prices or increase capital and other expenditures or cause us to lose sales volume, any of which could have a material adverse effect on our business and financial results. In most of our markets, our primary competitors have substantially greater financial, marketing, production and distribution resources than
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we, and are more diverse in terms of their geographies and brand portfolios. In all of the markets in which we operate, aggressive marketing strategies by these competitors could adversely affect our financial results. In addition, continuing consolidation among major global brewers may lead to stronger or new competitors, loss of partner brands and predatory marketing and pricing tactics by competitors. Moreover, several of our major markets are mature. Our products also compete for consumers against non-beer products such as wine, spirits and other alcoholic and non-alcoholic beverages.
Our success as an enterprise depends largely on the success of relatively few products in several mature markets; the failure or weakening of one or more of these products or markets could materially adversely affect our financial results. Our Molson Canadian and Coors Light brands in Canada, Miller Lite and Coors Light brands in the U.S., and Carling brand in the U.K. represented more than half of each respective segment's sales in 2012. 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. Consumer preferences and tastes may shift away from our brands or beer generally due to, among others, changing taste preferences, demographics or perceived value. Beer consumption in many of our markets is also tied to general economic conditions. Difficult macro-economic conditions in our markets may result in lower sales volume.
If Pentland and the Coors Trust do not agree on a matter submitted to stockholders, generally the matter will not be approved, even if beneficial to us or favored by other stockholders. Pentland Securities (1981) Inc. (the "Pentland Trust") (a company controlled by the Molson family and related parties) and the Adolph Coors, Jr. Trust (the "Coors Trust"), which together control more than ninety percent of our Class A common stock and Class A exchangeable shares, have voting trust agreements through which they have combined their voting power over the shares of our Class A common stock and the Class A exchangeable shares that they own. In the event that these two stockholders do not agree to vote in favor of a matter submitted to a stockholder vote (other than the election of directors), the voting trustees will be required to vote all of the Class A common stock and Class A exchangeable shares deposited in the voting trusts against the matter. There is no other mechanism in the voting trust agreements to resolve a potential deadlock between these stockholders. Therefore, if either the Pentland Trust or the Coors Trust is unwilling to vote in favor of a proposal that is subject to a stockholder vote, we would be unable to implement the proposal even if our board, 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. In addition, our Class B common stock has fewer voting rights than our Class A common stock.
Poor investment performance of pension plan holdings and other factors impacting pension plan costs could unfavorably impact liquidity and results of operations. 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. Without sustained growth in the pension investments over time to increase the value of the plans' assets, and depending upon the other factors as listed above, we could be required to fund the plans with significant amounts of cash. Such cash funding obligations could have a material impact on our cash flows, credit rating and cost of borrowing, financial position or results of operations.
We rely on a small number of suppliers to obtain the packaging we need to operate our business. The inability to obtain materials could unfavorably affect our ability to produce our products. We purchase certain types of packaging materials including aluminum, glass and paperboard from a small number of suppliers. Consolidation of the packaging materials suppliers has reduced local supply alternatives and increased risks of supply disruptions. The inability of any of these suppliers to meet our production requirements without sufficient time to develop an alternative source could have a material adverse effect on our business.
Termination of one or more manufacturer/distribution agreements could have a material adverse effect on our business. We manufacture and/or distribute products of other beverage companies through various joint ventures, licensing, distribution or other arrangements. The loss of one or more of these arrangements, as a result of industry consolidation or otherwise, could have a material adverse effect on the business and financial results of one or more reporting segments. For example, Miller Brewing Company (“Miller”) has notified us of its intent to terminate the license agreement between Miller and us in Canada, which could have an adverse impact on our Canadian volumes.
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 financial condition. Our business is highly regulated by federal, state, provincial and local laws and regulations in various countries regarding such matters as licensing requirements, trade and pricing practices, labeling, advertising, promotion and marketing practices, relationships with distributors, environmental matters, smoking bans at on-premise locations and other matters. These laws and regulations are subject to frequent re-evaluation, varying interpretations and political debate and inquiries from government regulators charged with their enforcement. Examples of this are the recently announced increase in beer excise tax rates of over 20% in Québec and a 50%
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increase to the statutory corporate income tax rate in Serbia. Failure to comply with existing laws and regulations or changes in these laws and regulations or in tax, environmental, excise tax levels imposed or any other laws or regulations could result in the loss, revocation or suspension of our licenses, permits or approvals and could have a material adverse effect on our business, financial condition and results of operations. Additionally, uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. Finally, advocates of prohibition and other severe restrictions on the marketing and sales of alcohol are becoming increasingly organized on a global basis, seeking to impose regulations to curtail substantially the consumption of alcohol, including beer, in developed and developing markets. To the extent such views gain traction in national regulations where we do or plan to do business, they could have a material adverse impact on our business and results of operations.
Our consolidated financial statements are subject to fluctuations in foreign exchange rates, most significantly the Canadian dollar, British Pound and our Central European operating currencies such as, but not limited to, Euro, Czech Koruna, Croatian Kuna, Serbian Dinar, New Romanian Leu and Bulgarian Lev. We hold assets and incur liabilities, earn revenues and pay expenses in different currencies, most significantly in Canada and in the U.K and throughout Central 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. To the extent that we fail to adequately manage these risks, including if our hedging arrangements do not effectively or completely hedge changes in foreign currency rates, our results of operations may be materially and adversely impacted.
Our operations face significant exposure to changes in commodity prices, which could materially and adversely affect our operating results. We use a large volume of agricultural and other raw materials to produce our products, including barley, barley malt, hops, corn, other various starches, water and packaging materials, including aluminum, cardboard and other paper products. We also use a significant amount of diesel fuel 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, 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, our results of operations could be materially and adversely impacted.
The success of our business relies heavily on brand image, reputation, product quality and protection of intellectual property. It is important that we maintain and increase the image and reputation of our existing products. Concerns about product quality, even when unsubstantiated, could be harmful to our image and reputation of our products. Deterioration to our brand equity may be difficult to combat or reverse and could have a material effect on our business and financial results. In addition, because our brands carry family names, personal activities by certain members of the Molson or Coors families that harm their public image or reputation could have an adverse effect on our brands. Further, the success of our Company is dependent on our ability to protect our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how.
Due to a high concentration of unionized workers in Canada, the United Kingdom, and at MillerCoors in the U.S., we could be significantly affected by labor strikes, work stoppages or other employee-related issues. Approximately 60%, 35% and 25% of our Canadian, MillerCoors and U.K. 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.
Changes to the regulation of the distribution systems for our products could adversely impact our business. In our U.S. market, there is a three-tier distribution system that has historically applied to the distribution of products now sold through MillerCoors (including our non-U.S. products). That system is increasingly subject to the legal challenges on the basis that it allegedly interferes with interstate commerce. To the extent that such challenges are successful and require changes to the three-tier system, such changes could have a materially adverse impact on MillerCoors and, consequently, MCBC. Further, in certain Canadian provinces, our products are distributed through joint venture arrangements that are mandated and regulated by provincial government regulators. If provincial regulation should change, the costs to adjust our distribution methods could have a material adverse impact on our business.
Changes in various supply chain standards or agreements could adversely impact our business. Our business includes various joint venture and industry agreements which standardize parts of the supply chain system. An example includes our warehousing and customer delivery systems organized under joint venture agreements with other brewers. Any negative change in these agreements could have a material adverse impact on our business.
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Because of our reliance on third-party service providers for certain administrative functions, we could experience a disruption to our business. We rely exclusively on information services providers worldwide for our information technology functions including network, help desk, hardware and software configuration. We also have outsourced a significant portion of work associated with our finance and accounting, human resources and other information technology functions to a third-party service provider. If one of these service providers was to fail and we were unable to find a suitable replacement in a timely manner, we could be unable to properly administer our outsourced functions. Additionally, our internal and outsourced systems may also be the target of outside parties attempting to breach our security, which, if successful, could expose us to the loss of key business information and disruption of our operations.
We may incur impairments of the carrying value of our goodwill and other intangible assets. In connection with various business combinations, we have allocated material amounts of the related purchase prices to goodwill and other intangible assets that are considered to have indefinite useful lives. These assets are tested for impairment at least annually, using estimates and assumptions affected by factors such as economic and industry conditions and changes in operating performance. Potential resulting charges could be material and could adversely impact our results of operations. Our most recent impairment analysis indicated that the fair value of our U.K. and Canada reporting units were close to failing step one of the goodwill impairment test. The fair value of the U.K. reporting unit and the Canada reporting unit were estimated at approximately 7% and 15% in excess of their carrying values, respectively. In addition, the fair value of the Molson core brands was estimated at approximately 14% in excess of its carrying value. The reporting units and Molson core brands are therefore at risk of a future impairment in the event of significant unfavorable changes in the forecasted cash flows, terminal growth rates, market transaction multiples and/or weighted-average cost of capital utilized in the discounted cash flow analysis. Additionally, we have identified risks to our Central Europe reporting unit due to weak economic conditions within the regions in which we operate, as well as risks related to the possible termination of our license agreement with Miller in Canada.
Climate change and water availability may negatively affect our business. There is concern that a gradual increase in global average temperatures could cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. While warmer weather has historically been associated with increased sales of beer, changing weather patterns could result in decreased agricultural productivity in certain regions which may limit availability or increase the cost of key agricultural commodities, such as hops, barley and other cereal grains, which are important ingredients for our products. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment. As a result, the effects of climate change could have a long-term, material adverse impact on our business and results of operations. There are also water availability risks. Climate change may cause water scarcity and a deterioration of water quality in areas where we maintain brewing operations. The competition for water among domestic, agricultural and manufacturing users is increasing in some of our brewing communities. Even where water is widely available, water purification and waste treatment infrastructure limitations could increase costs or constrain our operations.
Failure to successfully identify, complete or integrate attractive acquisitions and joint ventures into our existing operations could have an adverse impact on our business, financial condition and results of operations. We have made a number of acquisitions and entered into several joint ventures. In order to compete in the consolidating global brewing industry, we anticipate that we may, from time to time, in the future acquire additional businesses or enter into additional joint ventures that we believe would provide a strategic fit with our business. Potential issues associated with acquisitions and joint ventures could include, among other things: our ability to identify attractive acquisitions and joint ventures; our ability to offer potential acquisition targets and joint ventures competitive transaction terms; our ability to realize the benefits or cost savings that we expect to realize as a result of the acquisition or joint venture; diversion of management's attention; our ability to successfully integrate our businesses with the business of the acquired company; motivating, recruiting and retaining key employees; conforming standards, controls, procedures and policies, business cultures and compensation structures among our company and the acquired company; consolidating and streamlining sales, marketing and corporate operations; potential exposure to unknown liabilities of acquired companies; loss of key employees and customers of the acquired business; and managing tax costs or inefficiencies associated with integrating our operations following completion of an acquisition or entry into a joint venture. If an acquisition or joint venture is not successfully completed or integrated into our existing operations, our business, financial condition and results of operations could be adversely impacted.
Risks associated with operating our joint ventures may adversely affect our financial condition and results of operations. 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 markets. Disagreements with our business partners may impede our ability to maximize the benefits of our partnerships and adversely affect our results of operations. Our joint venture arrangements may require us, among other matters, to pay certain costs or to make certain capital investments or
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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, during 2012, we decided to terminate our joint venture in China due to the failure of our joint venture partner to meet its obligations.
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 in order to achieve our operating objectives, and changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business.
Our operations outside of North America and the U.K. expose us to additional risks which could harm our business, financial condition and results of operations. We expect our operations outside of North America and the U.K. to become more significant to our operating results as we continue to further expand internationally. In certain of these markets, we have limited operating experience and may not succeed. In addition to risks described elsewhere in this section, our operations in these markets expose us to additional risks, including: changes in local political, economic, social and labor conditions; restrictions on foreign ownership and investments; repatriation of cash earned in countries outside the U.S.; import and export requirements; 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.
Loss of a major brewery or other key facility, due to unforeseen or catastrophic events or otherwise, could have an adverse impact on our business. Our business and results of operations could be adversely impacted by physical risks such as earthquakes, hurricanes, other natural disasters or catastrophic events that damage or destroy one of our breweries or key facilities. Additionally, certain catastrophes are not covered by our general insurance policies, which could result in significant unrecoverable losses.
Impacts of the Acquisition on our financial position. As a result of the Acquisition, the already significant amount of goodwill and other intangible assets on our consolidated financial statements increased. Such amounts are subject to impairment assessments based upon future adverse changes in our business or prospects. In addition, we incurred a significant amount of additional indebtedness in connection with the Acquisition. After giving effect to our $1.9 billion senior notes offering, borrowings under the new credit and term loan agreements in connection with the Acquisition and the issuance of the Convertible Note to the Seller, we have outstanding $4,668 million of indebtedness as of December 29, 2012, and the ability to incur up to an additional €150 million, $550 million and $400 million of indebtedness under our revolving credit facilities. We may incur significantly more indebtedness in the future. As a result of the debt that we incurred in connection with the Acquisition, we have suspended share repurchases until our credit metrics are closer to pre-Acquisition levels, and there can be no assurance that our credit ratings will remain at an investment grade level or that they will improve. Additionally, any deterioration of our current credit rating from an investment grade level could result in less than favorable terms of future debt issuances, which may be necessary to support the ongoing needs of the business, fund future capital investments or acquisitions or refinance terms of our debt obligations currently outstanding. We also intend to use cash from operations to reduce our debt level, which will reduce funds available for other purposes and may increase our vulnerability to adverse economic or industry conditions. In addition, our indebtedness also subjects us to financial and operating covenants, which may limit our flexibility in responding to our business needs. If we are not able to maintain compliance with stated financial ratios or if we breach any of the other covenants in any debt agreement, we could be in default under such agreement. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies.
Risks Specific to the Canada Segment
We may experience continued price discounting in Canada. The continuation, acceleration or the increase of price discounting, in Ontario, Québec, Alberta or other provinces, could adversely impact our business.
In the event that we are required to move away from the industry standard returnable bottle we use today, we may incur unexpected losses. Along with ABI and other brewers in Canada, we currently use an industry standard returnable bottle which represents more than 40% of total volume sales in Canada. Changes to the Industry Standard Bottle Agreement could impact our use of the industry standard returnable bottle. If we cease to use the industry standard returnable bottle, our current bottle inventory and a portion of our bottle packaging equipment could become obsolete and could result in a material write-off of these assets.
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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. MillerCoors management is responsible for the day to day operations of the business and therefore, we do not have full control over the activities of MillerCoors. Our results of operations are dependent upon the efforts of MillerCoors management, our ability to govern the joint venture effectively with SABMiller and factors beyond our control that may affect SABMiller. Additionally, our disclosure controls and procedures with respect to MillerCoors are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
We may incur unexpected costs or face other business issues from MillerCoors due to challenges associated with integrating operations, technologies and other aspects of the operations. The MillerCoors management team continues to focus on fully integrating ours and SABMiller's U.S. operations, technologies and services, as well as the distribution networks including the resolution of disputes arising from the consolidation of distributors arising from the MillerCoors joint venture. The failure of MillerCoors to successfully integrate the two operations could adversely affect our financial results or prospects.
MillerCoors is highly dependent on independent distributors in the United States to sell its products, with no assurance that these distributors will effectively sell its and our products. MillerCoors sells all of its products and our non-U.S. products in the United States to distributors for resale to retail outlets and the regulatory environment of many states makes it very difficult to change distributors. Consequently, if MillerCoors is not allowed or is unable to replace unproductive or inefficient distributors, its business, financial position and results of operation may be adversely affected, which could have a material adverse effect on our business and financial results.
Risks Specific to the Central Europe Segment
We may not recognize the benefits of the Acquisition. We may not realize the expected benefits of the Acquisition because of integration difficulties and other challenges. The success of the Acquisition will depend, in part, on our ability to realize all or some of the anticipated synergies and other benefits from integrating MCCE's business with our existing businesses. The integration process may be complex, costly and time-consuming. The difficulties of integrating the operations of MCCE's business include, among others:
• | failure to implement our business plan for the combined business; |
• | unanticipated issues in integrating manufacturing, logistics, information, communications and other systems; |
• | possible inconsistencies in standards, controls, procedures and policies, and compensation structures between |
MCCE's structure and our structure;
• | failure to retain key customers and suppliers; |
• | unanticipated changes in applicable laws and regulations; |
• | failure to retain key employees; |
• | operating risks inherent in MCCE's business and our business; |
• | unanticipated issues, expenses and liabilities; |
• | unfamiliarity with operating in Central Europe. |
We may not be able to maintain the levels of revenue, earnings or operating efficiency that each of Molson Coors and MCCE had achieved or might achieve separately. In addition, we may not accomplish the integration of MCCE's business smoothly, successfully or within the anticipated costs or timeframe. Moreover, the markets in which MCCE operates may not experience the growth rates expected and any further economic downturn affecting Europe could negatively impact MCCE's business. These markets are in differing stages of development and may experience more volatility than expected or face more operating risks than in the more mature markets in which Molson Coors has historically operated. If we experience difficulties with the integration process or if the MCCE business or the markets in which it operates deteriorate, the anticipated cost savings, growth opportunities and other synergies of the Acquisition may not be realized fully, or at all, or may take longer to realize than expected. In such case, our business, financial condition and results of operations may be negatively impacted.
We face risks associated with the Sale and Purchase Agreement ("SPA") in connection with the Acquisition. In connection with the Acquisition, we assumed substantially all the liabilities of MCCE that were not satisfied on or prior to the closing date. There may be liabilities that we underestimated or did not discover in the course of performing our due diligence investigation of MCCE. Under the SPA and a management warranty deed (the "Management Warranty Deed"), the Seller has agreed to provide us with a limited set of representations and warranties. Our sole remedy from the Seller for any breach of those representations and warranties is an action for indemnification, not to exceed €100 million under the SPA and €50 million under the Management Warranty Deed. Damages resulting from a breach of a representation or warranty could have a material and adverse effect on our financial condition and results of operations.
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Economic trends and intense competition in certain Central European markets could unfavorably impact our profitability. Our Central European businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic and political conditions generally. During 2012, real gross domestic product declined in most of the major Central European markets in which we operate. Additionally, we face intense competition in certain of our Central 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 Central Europe to drive increased market share through aggressive pricing strategies could adversely affect our sales and results of operations.
Risks Specific to the United Kingdom Segment
Sales volume trends in the United Kingdom brewing industry reflect movement from on-premise channels to off-premise channels, a trend which unfavorably impacts our profitability. In recent years, beer volume sales in the U.K. have been shifting from pubs and restaurants (on-premise) to retail stores (off-premise), for the industry in general. A ban on smoking in pubs and restaurants across the whole of the U.K. enacted in 2007 accelerated this trend. Margins on sales to off-premise customers tend to be lower than margins on sales to on-premise customers, and, as a result, continuation or acceleration of these trends would further adversely impact our profitability.
Consolidation of pubs and growth in the size of pub chains in the United Kingdom could unfavorably impact pricing. The trend toward consolidation of pubs, away from independent pub and club operations, is continuing in the United Kingdom. These larger entities have stronger price negotiating power, and therefore continuation of this trend could impact our ability to obtain favorable pricing in the on-premise channel (due to the spillover effect of reduced negotiating leverage) and could reduce our revenues and profit margins. In addition, these larger customers continue to move to purchasing directly more of the products that, in the past, we have provided as part of our factored business. Further consolidation could contribute to an adverse financial impact.
In the event that a significant pub chain were to go bankrupt, or experience similar financial difficulties, our business could be adversely impacted. We extend credit to pub chains in the U.K., and in some cases the amounts are significant. The continuing challenging economic environment in the U.K. has caused business at on-premise outlets to slow since late 2008, and some pub chains may face increasing financial difficulty if economic conditions do not improve. In the event that a pub chain were to be unable to pay amounts owed to us as a result of bankruptcy or similar financial difficulties, our business could be adversely impacted.
We depend exclusively on one logistics provider for the distribution of our products in the United Kingdom. Tradeteam handles all of the physical distribution for us in the U.K., except where a different distribution system is requested by a customer. If Tradeteam were unable to continue distribution of our products and we were unable to find a suitable replacement in a timely manner, we could experience significant disruptions in our business that could have an adverse financial impact.
Risks Specific to the Molson Coors International Segment
An inability to expand our operations in emerging markets could adversely affect our growth prospects. Our ability to grow our MCI segment in emerging markets depends on social, economic and political conditions in those markets and on our ability to create effective product distribution networks and consumer brand awareness in new markets. Due to product price, local competition and cultural differences, there is no assurance that our products will be accepted in any particular emerging market. If we are unable to expand our businesses in emerging markets, our growth prospects could be adversely affected.
In addition, compliance with complex foreign laws and regulations, and U.S. laws such as the Foreign Corrupt Practices Act, that apply to our international operations increases our cost of doing business in some international jurisdictions. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries and a materially negative impact on our brands and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these foreign and U.S. laws and regulations, including the Foreign Corrupt Practices Act, there can be no assurance that our employees, business partners or agents will not violate our policies.
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,
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however, we could incur future statement of operations charges as facts further develop resulting in changes to our estimates or changes in our assessment of probability of loss on these items as well as due to fluctuations in foreign exchange rates. Due to the uncertainty involved in the ultimate outcome and timing of these contingencies, significant adjustments to the carrying value of our indemnity liabilities and corresponding statement of operations charges/credits could result in the future.
ITEM 1B. Unresolved Staff Comments
None.
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ITEM 2. Properties
As of December 29, 2012, our major facilities were owned (unless otherwise indicated) and are as follows:
Facility | Location | Character | ||
Canada Segment | ||||
Administrative offices | Toronto, Ontario | Canada Segment Headquarters | ||
Montréal, Québec | Corporate Headquarters | |||
Brewery/packaging plants | St John's, Newfoundland | Brewing and packaging | ||
Montréal, Québec(1) | Brewing and packaging | |||
Creemore, Ontario | Brewing and packaging | |||
Moncton, New Brunswick | 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 | |||
MCI Segment and Corporate | ||||
Administrative offices | Denver, Colorado(5) | Corporate and MCI Headquarters | ||
Miami, Florida(5) | MCI offices | |||
Madrid, Spain(5) | MCI offices | |||
Mumbai, India(5) | MCI offices | |||
Guangzhou, China(6) | MCI offices | |||
Tokyo, Japan(6) | MCI offices | |||
Hong Kong(6) | MCI offices | |||
Brewery/packaging plants | Chengde, China(7) | Brewing and packaging | ||
Patna, India | Brewing and packaging | |||
Central Europe Segment | ||||
Administrative offices | Prague, Czech Republic | Central Europe Segment Headquarters | ||
Brewery/packaging plants | Ploiesti, Romania(1) | Brewing and packaging | ||
Niksic, Montenegro | Brewing and packaging | |||
Prague, Czech Republic(1) | Brewing and packaging | |||
Ostrava, Czech Republic | Brewing and packaging | |||
Apatin, Serbia(1) | Brewing and packaging | |||
Haskovo, Bulgaria | Brewing and packaging | |||
Plovdiv, Bulgaria | Brewing and packaging | |||
Zagreb, Croatia, | Brewing and packaging | |||
Bőcs, Hungary | Brewing and packaging | |||
Distribution warehouses | Central Europe(8) | Distribution centers | ||
United Kingdom Segment | ||||
Administrative office | Burton-on-Trent, Staffordshire | U.K. Segment Headquarters | ||
Brewery/packaging plants | Burton-on-Trent, Staffordshire(1) | Brewing and packaging | ||
Tadcaster Brewery, Yorkshire | Brewing and packaging | |||
Alton Brewery, Hampshire | Brewing and packaging | |||
Sharp's Brewery, Cornwall | Brewing and packaging | |||
Malting/grain silos | Burton-on-Trent, Staffordshire | Malting facility | ||
Distribution warehouse | Burton-on-Trent, Staffordshire | Distribution center | ||
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(1) | Montréal and Toronto breweries collectively account for approximately 78% of our Canada production. The Burton-on-Trent brewery is our largest brewery in the U.K. and accounts for approximately 60% of our U.K. production. Apatin, Prague and Ploiesti breweries collectively account for approximately 57% of our Central Europe production. |
(2) | We own two brewing and packaging facilities in Vancouver, British Columbia. |
(3) | We own 11 distribution centers, lease two additional distribution centers, own one warehouse and lease seven additional warehouses in the Québec Province. |
(4) | We lease nine warehouses throughout Canada, excluding the Québec Province. |
(5) | Leased facility. |
(6) | We lease headquarter offices in Asia. Additionally, in China we lease regional offices to comply with local regulations which require an office in each city where we conduct business (55 cities). |
(7) | During the third quarter of 2012, we deconsolidated our joint venture in China, MC Si'hai, from our financial statements due to a loss of our ability to control the joint venture. |
(8) | We own 17 distribution centers, lease 17 additional distribution centers, own 6 warehouses and lease one additional warehouse throughout Central Europe. |
We believe our facilities are well maintained and suitable for their respective operations. In 2012, our operating facilities were not capacity constrained.
ITEM 3. Legal Proceedings
In December 2012, Miller Brewing Company (“Miller”) orally informed us of its intent to terminate the license agreement between Miller and us whereby we have exclusive rights to distribute certain Miller products in Canada (the “License Agreement”). Miller alleges that we failed to meet certain volume sales targets under the License Agreement. We do not believe Miller has any right under the License Agreement or otherwise to terminate the License Agreement. Following this communication, we filed a lawsuit in Ontario, Canada (Molson Canada 2005 v. Miller Brewing Company, Sup. Ct. of Justice-Ontario, CV-12-470589) seeking an injunction preventing Miller from terminating the License Agreement and ordering Miller to abide by its contractual terms. On January 18, 2013, Miller sent written notice to us purporting to terminate the License Agreement. In our lawsuit, we also assert that Miller breached the License Agreement by attempting to terminate the License Agreement. We intend to vigorously assert and defend our rights in this lawsuit. At this time we are unable to predict the outcome of this litigation or the impact, if any, of an adverse outcome on our business and results of operations, including any possible future asset impairment. As of December 29, 2012 we had a definite-lived intangible asset related to the License Agreement with a carrying value of approximately $70 million and a remaining life of 7 years.
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.
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, our indirect subsidiary, Molson Coors Canada Inc., has Class A exchangeable shares and Class B exchangeable shares trading 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
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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 15, 2013, 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 | 3,043 | |
Class A exchangeable shares | 257 | |
Class B exchangeable shares | 2,696 | |
The following table sets forth the high and low sales prices per share of our Class A common stock for each fiscal quarter of 2012 and 2011 as reported by the New York Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2012 | ||||||||||||
First quarter | $ | 45.74 | $ | 42.80 | $ | 0.32 | ||||||
Second quarter | $ | 45.80 | $ | 38.50 | $ | 0.32 | ||||||
Third quarter | $ | 46.30 | $ | 40.53 | $ | 0.32 | ||||||
Fourth quarter | $ | 45.50 | $ | 40.31 | $ | 0.32 | ||||||
2011 | ||||||||||||
First quarter | $ | 50.50 | $ | 42.85 | $ | 0.28 | ||||||
Second quarter | $ | 49.10 | $ | 43.75 | $ | 0.32 | ||||||
Third quarter | $ | 46.51 | $ | 40.00 | $ | 0.32 | ||||||
Fourth quarter | $ | 44.11 | $ | 39.25 | $ | 0.32 | ||||||
The following table sets forth the high and low sales prices per share of our Class B common stock for each fiscal quarter of 2012 and 2011 as reported by the New York Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2012 | ||||||||||||
First quarter | $ | 45.99 | $ | 41.96 | $ | 0.32 | ||||||
Second quarter | $ | 45.91 | $ | 37.96 | $ | 0.32 | ||||||
Third quarter | $ | 46.35 | $ | 39.88 | $ | 0.32 | ||||||
Fourth quarter | $ | 45.19 | $ | 39.46 | $ | 0.32 | ||||||
2011 | ||||||||||||
First quarter | $ | 50.74 | $ | 42.50 | $ | 0.28 | ||||||
Second quarter | $ | 49.58 | $ | 43.41 | $ | 0.32 | ||||||
Third quarter | $ | 46.71 | $ | 38.72 | $ | 0.32 | ||||||
Fourth quarter | $ | 44.13 | $ | 37.99 | $ | 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 fiscal quarter of 2012 and 2011 as reported by the Toronto Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2012 | ||||||||||||
First quarter | C$ | 45.50 | C$ | 42.64 | $ | 0.32 | ||||||
Second quarter | C$ | 43.00 | C$ | 39.05 | $ | 0.32 | ||||||
Third quarter | C$ | 47.00 | C$ | 40.00 | $ | 0.32 | ||||||
Fourth quarter | C$ | 44.09 | C$ | 39.77 | $ | 0.32 | ||||||
2011 | ||||||||||||
First quarter | C$ | 50.67 | C$ | 42.65 | $ | 0.28 | ||||||
Second quarter | C$ | 46.75 | C$ | 42.00 | $ | 0.32 | ||||||
Third quarter | C$ | 44.14 | C$ | 40.66 | $ | 0.32 | ||||||
Fourth quarter | C$ | 44.89 | C$ | 39.90 | $ | 0.32 | ||||||
The following table sets forth the high and low sales prices per share of our Class B exchangeable shares for each fiscal quarter of 2012 and 2011 as reported by the Toronto Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2012 | ||||||||||||
First quarter | C$ | 46.32 | C$ | 42.26 | $ | 0.32 | ||||||
Second quarter | C$ | 45.50 | C$ | 39.52 | $ | 0.32 | ||||||
Third quarter | C$ | 45.00 | C$ | 39.01 | $ | 0.32 | ||||||
Fourth quarter | C$ | 44.50 | C$ | 39.60 | $ | 0.32 | ||||||
2011 | ||||||||||||
First quarter | C$ | 50.50 | C$ | 42.26 | $ | 0.28 | ||||||
Second quarter | C$ | 46.75 | C$ | 42.57 | $ | 0.32 | ||||||
Third quarter | C$ | 44.74 | C$ | 40.17 | $ | 0.32 | ||||||
Fourth quarter | C$ | 45.74 | C$ | 39.89 | $ | 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, Modelo 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 28, 2007, (the last trading day of our fiscal year 2007) in our Class B common stock, the S&P 500 and the Peer Group, and assumes reinvestment of all dividends.
Molson Coors Brewing Company
At Fiscal-Year End | ||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||||||||
Molson Coors | $ | 100.00 | $ | 91.63 | $ | 88.86 | $ | 103.91 | $ | 91.45 | $ | 92.50 | ||||||||||||
S&P 500 | $ | 100.00 | $ | 60.43 | $ | 79.91 | $ | 90.97 | $ | 92.97 | $ | 106.05 | ||||||||||||
Peer Group(1) | $ | 100.00 | $ | 56.34 | $ | 103.91 | $ | 120.18 | $ | 123.41 | $ | 167.32 | ||||||||||||
(1) | The Peer Group represents the weighted-average based on market capitalization of the common stock of MCBC, SABMiller, ABI, Carlsberg, Heineken, Modelo and Asahi. These securities are traded on various exchanges throughout the world. |
Issuer Purchases of Equity Securities
In 2011, we announced that our Board of Directors approved and authorized a program to repurchase up to $1.2 billion of our Class A and Class B common stock in the open market or in privately negotiated transactions. The program has an expected term of three years and the number, price, and timing of the repurchases will be at our sole discretion and will be evaluated depending on market conditions, liquidity needs or other factors. Our Board of Directors may suspend, modify, or terminate the program at any time without prior notice. We did not make any share repurchases during the three months ended December 29, 2012.
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ITEM 6. Selected Financial Data
The table below summarizes selected financial information for the five years ended as noted. For further information, refer to our consolidated financial statements and notes thereto presented under Part II—Item 8 Financial Statements and Supplementary Data.
2012(1)(2) | 2011(1) | 2010(1) | 2009(1) | 2008(1) | ||||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||
Consolidated Statements of Operations: | ||||||||||||||||||||
Net sales(3) | $ | 3,916.5 | $ | 3,515.7 | $ | 3,254.4 | $ | 3,032.4 | $ | 4,774.3 | ||||||||||
Income from continuing operations attributable to MCBC | $ | 441.5 | $ | 674.0 | $ | 668.1 | $ | 729.4 | $ | 390.8 | ||||||||||
Income from continuing operations attributable to MCBC per share: | ||||||||||||||||||||
Basic | $ | 2.44 | $ | 3.65 | $ | 3.59 | $ | 3.96 | $ | 2.14 | ||||||||||
Diluted | $ | 2.43 | $ | 3.62 | $ | 3.57 | $ | 3.92 | $ | 2.11 | ||||||||||
Consolidated Balance Sheets: | ||||||||||||||||||||
Total assets | $ | 16,212.2 | $ | 12,423.8 | $ | 12,697.6 | $ | 12,021.1 | $ | 10,386.6 | ||||||||||
Short-term borrowings and current portion of long-term debt | $ | 1,245.6 | $ | 46.9 | $ | 1.1 | $ | 300.3 | $ | 0.1 | ||||||||||
Long-term debt | $ | 3,422.5 | $ | 1,914.9 | $ | 1,959.6 | $ | 1,412.7 | $ | 1,752.0 | ||||||||||
Other information: | ||||||||||||||||||||
Dividends per share of common stock | $ | 1.28 | $ | 1.24 | $ | 1.08 | $ | 0.92 | $ | 0.76 | ||||||||||
(1) | Fiscal year 2011 contained 53 weeks whereas fiscal years 2008, 2009, 2010, and 2012 contained 52 weeks. |
(2) | Reflects activity as a result of our acquisition of StarBev Holdings S.a.r.l. on June 15, 2012. |
(3) | As a result of the MillerCoors formation on July 1, 2008, and MCBC's prospective equity accounting for MillerCoors, net sales for the fifty-two weeks ended December 28, 2008, only include net U.S. sales through the period ended June 30, 2008. |
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 subsidiaries. On June 15, 2012, we completed our acquisition (the "Acquisition") of StarBev Holdings S.a.r.l. ("StarBev"), which we subsequently renamed Molson Coors Central Europe ("MCCE"), operating in Central Europe (which includes Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina and Slovakia). Our other subsidiaries include: Molson Coors Canada ("MCC"), operating in Canada; MillerCoors LLC ("MillerCoors"), which is accounted for by us under the equity method of accounting, operating in the United States ("U.S."); Molson Coors Brewing Company (UK) Limited ("MCBC-UK"), operating in the United Kingdom ("U.K.") and the Republic of Ireland; Molson Coors International ("MCI") operating in various other countries; and our other non-operating subsidiaries.
Unless otherwise indicated, (a) all $ amounts are in U.S. Dollars ("USD"), (b) comparisons are to comparable prior periods, and (c) 2012 refers to the 52 weeks ended on December 29, 2012, 2011 refers to the 53 weeks ended on December 31, 2011, and 2010 refers to the 52 weeks ended on December 25, 2010.
MillerCoors and MCCE follow a monthly reporting calendar. For MillerCoors, 2012, 2011 and 2010 refer to the 12 months ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively. For MCCE, 2012 refers to the period from the Acquisition date of June 15, 2012, through December 31, 2012.
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 pre-tax 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. Our management uses underlying income, underlying income per diluted share, underlying effective tax rate and underlying free cash flow as measures of operating performance to assist in comparing performance from period to period on a consistent basis; as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We believe that underlying income, underlying income per diluted share, underlying effective tax rate and underlying free cash flow performance are used by and are useful to investors and other users of our financial statements in evaluating our operating performance because they provide an additional tool to evaluate our performance without regard to special and non-core items, such as acquisition-related costs, which can vary substantially from company to company depending upon accounting methods and book value of assets and capital structure. We have provided reconciliations of all non-GAAP measures to their nearest U.S. GAAP measures.
Executive Summary
We are one of the world's largest brewers and have a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian, Carling and Staropramen, as well as craft and specialty beers such as Blue Moon, Creemore Springs, Cobra and Doom Bar. For more than 350 combined years, we have been brewing, innovating and delighting the world's beer drinkers. Our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
For the full year 2012, the biggest news was the acquisition of our Central Europe business, which we expect to strengthen our company, enhance our growth profile and increase shareholder value in the years ahead. We have begun implementing plans to capture synergies, leverage best practices and pay down debt related to buying this new business.
In 2012, we continued to focus on the three pillars of our growth strategy: to grow profitably in our core businesses through brands and innovation; to grow in new and emerging markets; and when it meets our strict shareholder return criteria, to grow through mergers and acquisitions. As in previous years, the first of these pillars was our primary focus as we continued to invest in our key brands and fill our innovation pipeline including growing Coors Light 2012 market share in the U.S., U.K., and, including Coors Light Iced T, in Canada. Additionally, our above-premium craft portfolios in the U.S. and Canada out-performed the industry and grew market share. In our second growth pillar, MCI drove improved financial performance in the fourth quarter of 2012 as we began liquidating our under-performing China joint venture, restructured our Coors Light business in the rest of China, improved performance in Japan, and integrated the Central Europe license and export business. In our third growth pillar, the Central Europe integration has gone well. We are on schedule to capture the committed $50 million of cost and revenue synergies, and we are leveraging important process and commercial learnings from this business globally. The addition of this business provided more than $70 million of pre-tax earnings accretion in 2012 on an underlying basis (net of related interest expense).
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Acquisition of StarBev
On June 15, 2012, we completed the Acquisition of StarBev from StarBev L.P. (the "Seller") for approximately €2.7 billion (or $3.4 billion), including the assumption and payoff of existing StarBev indebtedness. Headquartered in Amsterdam and Prague, StarBev is one of the largest brewers in Central Europe. StarBev, which we renamed Molson Coors Central Europe ("MCCE"), operates nine breweries in Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary and Montenegro and sold approximately 13.3 million hectoliters of beer in 2011, including sales in Bosnia-Herzegovina and Slovakia. In 2011, StarBev held a top-three market share position in each of its markets, and its brand portfolio includes local champions such as Staropramen, Borsodi, Kamenitza, Bergenbier, Ozujsko, Jelen and Niksicko, and it also brews and distributes other brands under license. Staropramen is distributed and sold in over 45 countries. The operating results of MCCE are reported in our Central Europe and MCI segments.
The Acquisition fits squarely into our strategy to increase our portfolio of premium brands and deepen our reach into growth markets around the world. We believe the Central European beer market is attractive, with strong historical trends and upside potential as the region returns to its pre-economic-crisis growth rates. We believe MCCE, as a market leader in the Central European region, will provide us with a platform for growth and an excellent foundation from which to extend our key brands. We believe that Staropramen, MCCE's international flagship brand, will also enhance our portfolio in some of our current and planned markets.
2012 Financial Highlights:
• | We increased net sales, gross profit, underlying operating income and underlying after-tax income in 2012. Net income from continuing operations attributable to MCBC of $441.5 million ($2.43 per diluted share) decreased 34.5% from a year ago, primarily driven by MCCE-related financing and acquisition costs and special charges related to the impairments and related costs upon deconsolidation of our China joint venture, Molson Coors Si'hai ("MC Si'hai"), restructuring charges incurred by each of our segments and unfavorable foreign currency movements. Underlying after-tax income of $710.5 million, or $3.91 per diluted share, increased 1.3% compared to 2011, due to including the results of our Central Europe operations and positive performance in the U.S., partially offset by lower underlying earnings in Canada and the U.K., and unfavorable foreign currency movements. U.K. volume and Canada volume and pre-tax income benefited in 2011 from an additional week in our fiscal calendar. Our underlying income excludes some special and other non-core gains, losses and expenses that net to a $273.1 million pre-tax charge as explained below. Worldwide beer volume for Molson Coors in 2012 increased 13.9% compared to 2011, primarily due to including the results of our Central Europe operations, partially offset by lower volumes in Canada, the U.S. and the U.K. Additionally, total-company net sales increased 11.4% compared to 2011, primarily due to including the results of our Central Europe operations, positive pricing in Canada and higher MCI volumes, partially offset by lower volumes in Canada and the U.K. |
• | We generated cash flow from operating activities of $983.7 million, representing a 13.3% increase from $868.1 million in 2011 and a 31.2% increase from $749.7 million in 2010, due to including the results of our Central Europe operations and favorable working capital movements. Underlying free cash flow in 2012 was $864.7 million compared to $618.4 million in 2011, representing an increase of 39.8% and driven by including the results of our Central Europe operations and favorable working capital movements. |
• | Along with approximately $601 million of available cash, we used the proceeds from $1.9 billion in senior unsecured notes, $300 million of bank debt, and a zero-coupon €500 million convertible note (or approximately $646 million fair value at closing) to purchase StarBev for approximately $3.4 billion, which represents a multiple of 10.8 times StarBev's 2011 pro forma underlying earnings before interest, taxes, depreciation and amortization, a non-GAAP measure. As we focus on achieving debt ratios closer to pre-Acquisition levels, we paid down approximately $180 million of our bank debt in the second half of 2012. |
• | Regionally: |
• | In Canada during 2012, we achieved positive pricing and brand mix. We strengthened our above-premium portfolio by introducing Rickard's Cardigan and Oakhouse seasonal brands and by acquiring the licenses for the Newcastle Brown Ale and Strongbow cider brands. We also launched aluminum pint bottles for Coors Light and Molson Canadian. Our 2012 income from continuing operations before income taxes and underlying pre-tax income in Canada decreased by 10.9% to $423.0 million and by 10.2% to $436.7 million, respectively, compared to 2011. Positive pricing and cost reductions were more than offset by the negative impact of lower volume, a mix shift toward higher-cost products and packages, increased pension costs and negative foreign currency movements. Canada also benefited in 2011 from an additional week in our fiscal calendar a year ago which added approximately 0.140 million hectoliters of sales volume and $12 million to pre-tax income. |
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• | In the U.S., Coors Light significantly outperformed the premium light segment and posted its eighth consecutive year of growth. We completed the relaunch of Miller64 and rolled out Leinenkugel's Lemon Berry Shandy and Batch 19. Also in above-premium, we expanded Henry Weinhard's brands nationally and tested Redd's Apple Ale and Third Shift. The Blue Moon and Leinenkugel's brands continued to lead the craft beer segment with double-digit growth. We also purchased the Crispin Cider Company, which gives us brands in the fast-growing U.S. cider category. We continue to work hard to improve volume trends for Miller Lite, which is an important and profitable brand for us. Our 2012 equity income in MillerCoors increased 11.6% to $510.9 million, while underlying equity income in MillerCoors increased 9.2% to $524.3 million compared to 2011, driven by strong net pricing, favorable brand mix and cost savings, partially offset by lower sales volume, commodity inflation, increased marketing investments and spending behind new products and packaging innovations. |
• | In Central Europe, we delivered a strong competitive performance in a tough trading environment with share and pricing growth in all our key markets, accelerated innovation performance driven by beer mixes, Staropramen growth in double digits and strict overhead cost management. On a full-year basis, we took the market share leadership position in Bulgaria, grew share in Croatia to its highest level in the past 10 years and achieved strong volume growth and record on-premise share in Czech Republic. We recorded solid share growth in all of our major markets in 2012 apart from Romania, where we gave up volume share in the thin-margin value segment. In our Central Europe segment, we reported 2012 income from continuing operations before income taxes of $97.4 million and 2012 underlying pre-tax income of $112.4 million. On a pro forma basis, Central Europe income from continuing operations before income taxes for 2012 decreased 26.3% to $121.5 million, and underlying pre-tax income for 2012 decreased 27.0% to $125.4 million due to significant unfavorable foreign currency movements, input cost inflation and lower volume, partially offset by positive pricing and lower marketing, general and administrative expenses. Pro forma amounts are used to give effect to the Acquisition as if it had occurred at the beginning of fiscal year 2011 and are discussed further in "Results of Operations." |
• | In a very challenging U.K. beer market, we now have two of the fastest growing premium brands with Coors Light and Doom Bar. We introduced Carling Zest with the launch being recognized as the best of the year in the U.K. by A.C. Nielsen. Our 2012 income from continuing operations before income taxes and underlying pre-tax income in the U.K. of $38.8 million and $59.6 million, respectively, represent decreases of $60.5 million and $41.9 million, respectively, compared to 2011, driven by lower sales volume, higher input inflation, higher pension expense and fixed cost deleverage from lower volume, partially offset by cost reduction initiatives and lower marketing investments. |
• | During 2012, our approach to International organic growth within MCI continued to focus on disciplined market development, strong strategic partnerships and sound investments in our brands. Our MCI 2012 loss from continuing operations before income taxes increased by 116.5% to $72.1 million, due to the impairment loss recorded upon deconsolidation of our MC Si'hai joint venture. Our 2012 underlying pre-tax loss decreased by 9.0% to $29.4 million, driven by the addition of the Central Europe export and license business. |
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The following table highlights summarized components of our consolidated summary of operations for the years ended December 29, 2012, December 31, 2011, and December 25, 2010, and provides a reconciliation of "underlying income" to its nearest U.S. GAAP measure.
For the years ended | |||||||||||||||||
December 29, 2012 | % change | December 31, 2011 | % change | December 25, 2010 | |||||||||||||
(In millions, except percentages and per share data) | |||||||||||||||||
Volume in hectoliters | 25.343 | 34.4 | % | 18.861 | 2.2 | % | 18.464 | ||||||||||
Net sales | $ | 3,916.5 | 11.4 | % | $ | 3,515.7 | 8.0 | % | $ | 3,254.4 | |||||||
Net income attributable to MCBC from continuing operations | $ | 441.5 | (34.5 | )% | $ | 674.0 | 0.9 | % | $ | 668.1 | |||||||
Adjustments: | |||||||||||||||||
Special items(1) | 81.4 | N/M | 12.3 | (42.3 | )% | 21.3 | |||||||||||
42% of MillerCoors specials, net of tax(2) | 13.4 | (71.7 | )% | 47.4 | N/M | 12.7 | |||||||||||
Acquisition, integration and financing related costs(3) | 170.5 | N/M | — | N/M | — | ||||||||||||
Unrealized mark-to-market (gains) and losses(4) | 12.8 | 178.3 | % | 4.6 | N/M | — | |||||||||||
Basis amortization related to the Sparks brand impairment(5) | — | (100.0 | )% | (25.2 | ) | N/M | — | ||||||||||
Other non-core items(6) | (5.0 | ) | (165.8 | )% | 7.6 | (115.6 | )% | (48.6 | ) | ||||||||
Tax impact of Serbia statutory tax rate increase(7) | 38.3 | N/M | — | N/M | — | ||||||||||||
Noncontrolling interest effect on special items(8) | (5.1 | ) | N/M | — | N/M | — | |||||||||||
Tax effect on special and non-core items(9) | (37.3 | ) | 94.3 | % | (19.2 | ) | N/M | 13.4 | |||||||||
Non-GAAP: Underlying net income attributable to MCBC from continuing operations | $ | 710.5 | 1.3 | % | $ | 701.5 | 5.2 | % | $ | 666.9 | |||||||
Net income attributable to MCBC per diluted share from continuing operations | $ | 2.43 | (32.9 | )% | $ | 3.62 | 1.4 | % | $ | 3.57 | |||||||
Non-GAAP: Underlying net income attributable to MCBC per diluted share from continuing operations | $ | 3.91 | 4.0 | % | $ | 3.76 | 5.6 | % | $ | 3.56 | |||||||
N/M = not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 9 "Special Items" of the Notes to the Consolidated Financial Statements ("Notes") for additional information. |
(2) | See "Results of Operations", "United States Segment" under the sub-heading "Special Items" in this section for additional information. |
(3) | In connection with the Acquisition, we recognized consulting and legal fees. Related to these fees we recorded $40.2 million as marketing, general and administrative expenses in 2012. 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. 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. See Part II—Item 8 Financial Statements and Supplementary Data, Note 7 "Other Income and Expense" and Note 14 "Debt" of the Notes for additional information. Also, as part of the allocation of the consideration transferred for the Acquisition, MCCE'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 MCCE's gross profit after the Acquisition date of June 15, 2012, as all of this inventory was subsequently sold by MCCE in the second quarter of 2012. Finally, in connection with the Acquisition, we used the proceeds from our issuance of the $1.9 billion senior notes to purchase Euros. As a result of a negative foreign exchange movement between the Euro and USD prior to using these proceeds to fund the Acquisition, we realized a foreign exchange loss of $57.9 million on our Euro cash holdings in the second quarter of 2012 and recorded as other |
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expense. See Part II—Item 8 Financial Statements and Supplementary Data, Note 7 "Other Income and Expense" of the Notes for additional information.
(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 2012, we recognized an unrealized gain of $8.0 million recorded as interest expense. See Part II—Item 8 Financial Statements and Supplementary Data, Note 14 "Debt" and Note 18 "Derivative Instruments and Hedging Activities" of the Notes for additional information. Additionally, we recognized a net unrealized foreign exchange loss of $23.8 million related to financing instruments entered into in conjunction with the financing and closing of the Acquisition in 2012 recorded as other expense. See Part II—Item 8 Financial Statements and Supplementary Data, Note 14 "Debt" of the Notes for additional information. |
The unrealized gain related to changes in fair value on aluminum and diesel swaps 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, allowing our segments to realize the economic effects of the derivative without the resulting unrealized mark-to-market volatility. Unlike the majority of our derivative contracts, these swaps are not designated in a hedge accounting relationship. We recorded an unrealized gain of $3.0 million and an unrealized loss of $4.6 million related to these derivatives in 2012 and 2011, respectively.
(5) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 5 "Investments" of the Notes under the sub-headings "Equity Investments" and "Investment in MillerCoors" for additional information. |
(6) | In 2012, we recognized a gain of $5.2 million related to a sale of water rights recorded as other income. |
We recognized gains related to the mark-to-market impact and settlement of the Foster's total return swap and options of $0.8 million and $47.9 million in 2011 and 2010, respectively, recorded as other income. This related to cash settled total return swap contracts entered into in 2008 in order to gain an economic interest exposure to Foster's Group Limited ("Foster's") stock, a major global brewer, and option contracts entered into in 2010 to limit our exposure to future changes in Foster's stock price.
In 2011, we recognized a $6.7 million loss related to the designation of our cross currency swap contracts as a net investment hedge of our Canadian business recorded as other expense. These swaps were historically designated as cash flow hedges and upon dedesignation as cash flow hedges, we reclassified the amounts previously recognized in accumulated other comprehensive income to earnings.
Other items included as non-core items include gains on sale of non-operating real estate, changes to environmental litigation provisions and the repayment of tax rebates received in the U.K.
(7) | In the fourth quarter of 2012, the Serbian government increased statutory corporate income tax rates from 10% to 15%, effective January 1, 2013. As a result of the impact of the rate change on differences between the book basis and tax basis of intangible and other assets purchased in the Acquisition, we increased our deferred tax liability by, and recognized income tax expense of, $38.3 million. |
(8) | The effect of noncontrolling interest on the adjustments used to arrive at underlying income, a non-GAAP measure, is calculated based on our ownership percentage of our subsidiaries from which each adjustment arises. This adjustment relates primarily to the goodwill impairment charge in our MC Si'hai joint venture. See Part II—Item 8 Financial Statements and Supplementary Data, Note 13 "Goodwill and Intangible Assets" of the Notes for additional information. |
(9) | The effect of taxes on the adjustments used to arrive at underlying net income, a non-GAAP measure, is calculated based on applying the estimated underlying full-year effective tax rate to underlying earnings, excluding special and non-core items. The effect of taxes on special and non-core items is calculated based on the statutory tax rate applicable to the item being adjusted for in the jurisdiction from which each adjustment arises. |
Worldwide beer volume
Worldwide beer volume is composed of our financial volume, royalty volume and proportionate share of equity investment sales-to-retail. 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 sales-to-retail 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").
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The following table highlights summarized components of our sales volume for the years ended December 29, 2012, December 31, 2011, and December 25, 2010:
For the years ended | ||||||||||||||
December 29, 2012 | % change | December 31, 2011 | % change | December 25, 2010 | ||||||||||
(In millions, except percentages) | ||||||||||||||
Volume in hectoliters: | ||||||||||||||
Financial volume | 25.343 | 34.4 | % | 18.861 | 2.2 | % | 18.464 | |||||||
Royalty volume(1) | 1.064 | 135.9 | % | 0.451 | 30.0 | % | 0.347 | |||||||
Owned volume | 26.407 | 36.7 | % | 19.312 | 2.7 | % | 18.811 | |||||||
Proportionate share of equity investment sales-to-retail(2) | 28.652 | (1.4 | )% | 29.046 | (2.8 | )% | 29.878 | |||||||
Total worldwide beer volume | 55.059 | 13.9 | % | 48.358 | (0.7 | )% | 48.689 | |||||||
(1) | Includes our MCI segment volume in Russia, Ukraine, Mexico, Spain, Vietnam and Philippines and a portion of our U.K. segment volume in Ireland. |
(2) | Reflects the addition of our proportionate share of equity method investments sales-to-retail for the periods presented. |
Our worldwide beer volume increased 13.9% in 2012 compared to 2011, due to including the results of our Acquisition. Excluding the volume results from our Acquisition, our worldwide beer volume declined 3.2% in 2012 driven by lower volumes in the U.K., U.S. and Canada. Worldwide beer volume decreased 0.7% in 2011 versus 2010, driven by lower volumes in the U.S. and Canada, partially offset by higher volumes in the U.K. and MCI.
Synergies and other cost savings initiatives
We achieved $74 million and $200 million of cost savings in 2012 and program to date, respectively, exceeding our second Resources for Growth ("RFG2") program's three-year goal of $150 million of annualized cost reductions by the end of 2012. In addition to our RFG2 savings, MillerCoors delivered incremental cost savings of $110 million in 2012. We benefit from 42% of the MillerCoors cost savings.
Components of our Statements of Operations
Net sales—Our net sales represent the sale of beer and other malt beverages net of excise taxes, the vast majority of which are brands that we own and brew ourselves. We import or brew and sell certain non-owned partner brands under licensing and related arrangements. We also sell certain "factored" brands (beverage brands owned by other companies, but sold and distributed by us), to on-premise customers in the U.K. In addition, we contract manufacture for other brewers in some of our markets.
Cost of goods sold—Our cost of goods sold includes costs we incur to make and ship beer. These costs include brewing materials, such as barley, hops, and various grains. Packaging materials, including glass bottles, aluminum and steel cans, cardboard and paperboard are also included in our cost of goods sold. Additionally, our cost of goods sold include both direct and indirect labor, freight costs, utilities, maintenance costs, depreciation, promotional packaging, other manufacturing overheads and costs to purchase factored brands from suppliers, as well as the estimated cost to facilitate product returns.
Marketing, general and administrative—Our marketing, general and administrative expenses include media advertising (television, radio, print), tactical advertising (signs, banners, point-of-sale materials) and promotion costs on both local and national levels within our operating segments. This classification includes general and administrative costs for functions such as finance, legal, human resources and information technology, which consist primarily of labor and outside services, as well as bad debt expense related to our allowance for doubtful accounts. These costs also include our marketing and sales organizations, including labor and other overheads. This line item includes amortization costs associated with intangible assets, as well as certain depreciation costs related to non-production equipment and share-based compensation.
Special items—Our special items represent charges incurred or benefits realized that we do not believe to be indicative of our core operations; specifically, such items are considered to be one of the following:
• | infrequent or unusual items, |
• | impairment or asset abandonment-related losses, or |
• | restructuring charges and other atypical employee-related costs. |
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Although we believe these items are not indicative of our core operations, the items classified as special items are not necessarily non-recurring.
Equity income in MillerCoors—Our equity income in MillerCoors represents our proportionate share for the period of the net income of our investment in MillerCoors accounted for under the equity method. Such amount typically reflects adjustments similar to those made in preparing consolidated statements, including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between cost and underlying equity in net assets upon the formation of MillerCoors.
Interest expense, net—Out interest costs are associated with borrowings to finance our operations. Interest income in the U.K. segment is associated with trade loans receivable from customers.
Other income (expense)—Our other income (expense) classification includes primarily gains and losses associated with activities not directly related to brewing and selling beer. For instance, certain gains or losses on foreign exchange and on sales of non-operating assets are classified in this line item.
Discussions of statements of operations line items such as noncontrolling interests and discontinued operations are discussed in detail elsewhere in MD&A and in Part II—Item 8 Financial Statements and Supplementary Data in the Notes.
Depreciation and Amortization
Depreciation and amortization expense was $272.7 million in 2012, an increase of $55.6 million compared to 2011, primarily due to the Acquisition. Depreciation and amortization expense was $217.1 million in 2011, an increase of $14.8 million compared to 2010.
Income Taxes
Our effective tax rate, a U.S. GAAP measure, was approximately 26% in 2012, 13% in 2011 and 17% in 2010. 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 Canada, Central Europe and U.K. businesses. The 2012 effective tax rate increased versus 2011 due to the statutory corporate income tax rate increase in Serbia as a result of differences between the book and tax bases of intangible assets purchased in the Acquisition increasing our deferred tax liability. Additionally, the increase in valuation allowances in 2012 also contributed to the higher 2012 effective rate driven by losses in the normal course of business in foreign jurisdictions and a capital loss generated in the U.S. related to the impairment charges recognized in our MC Si'hai joint venture in China. Our 2011 effective tax rate and our 2011 underlying effective tax rate, a non-GAAP measure, were low compared to 2012 due primarily to the favorable resolution of unrecognized tax positions and lower valuation allowances. See table below for the reconciliation of our underlying effective tax rate to its nearest U.S. GAAP measure.
For the years ended | |||||||||
December 29, 2012 | December 31, 2011 | December 25, 2010 | |||||||
Effective tax rate | 26 | % | 13 | % | 17 | % | |||
Adjustments: | |||||||||
Tax rate changes | (5 | )% | — | % | — | % | |||
Acquisition-related costs | (2 | )% | — | % | — | % | |||
China impairments | (1 | )% | — | % | — | % | |||
MillerCoors special items | — | % | 1 | % | — | % | |||
Foster's total return swap | — | % | — | % | (1 | )% | |||
Non-GAAP: Underlying effective tax rate | 18 | % | 14 | % | 16 | % | |||
Discontinued Operations
Discontinued operations are primarily associated with the formerly-owned Cervejarias Kaiser Brasil S.A. ("Kaiser") business in Brazil. See Part II—Item 8 Financial Statements and Supplementary Data, Note 6 "Discontinued Operations" of the Notes for discussions of the nature of amounts recognized in the discontinued operations section of the consolidated statements of operations, which consists primarily of amounts associated with indemnity obligations to FEMSA Cerveza S.A. de C.V. ("FEMSA") related to purchased tax credits and other tax, civil and labor issues.
We recognized gains from discontinued operations of $1.5 million, $2.3 million and $39.6 million during 2012, 2011, and 2010, respectively. This amount is typically associated with adjustments to the indemnity liabilities due to changes in estimates
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and foreign exchange gains or losses. However, during 2010, we recognized a gain of $42.6 million related to our settlement of a portion of our indemnity liabilities to FEMSA.
Additionally, during the third quarter of 2012, we finalized the settlement related to a distributorship litigation in Brazil for $6.8 million. We recognized a loss on settlement of the litigation of $2.0 million during 2012, as we had accrued $4.8 million as of December 31, 2011. In 2011, we incurred a loss related to an adjustment in legal reserves related to discontinued operations of $0.4 million. See Part II—Item 8 Financial Statements and Supplementary Data, Note 20 "Commitments and Contingencies" of the Notes for further discussion.
Results of Operations
Canada Segment
The Canada segment consists of our production, marketing and sales of the Molson family of brands, Coors Light, Rickard's, Carling, and other owned and licensed brands in Canada. Also included in the Canada segment is MMI, our joint venture established to import, distribute, and market the Modelo beer brand portfolio across all Canadian provinces and territories. MMI is accounted for under the equity method. In addition, the Canada segment includes Brewers' Retail, Inc. ("BRI"), our joint venture arrangement related to the distribution and retail sale of beer in Ontario, and Brewers' Distributor Ltd. ("BDL"), our joint venture arrangement related to the distribution of beer in the western provinces. Both BRI and BDL are accounted for under the equity method.
The following represents our results of operations for Canada for the years ended December 29, 2012, December 31, 2011, and December 25, 2010.
For the years ended | ||||||||||||||||||
December 29, 2012 | % change | December 31, 2011 | % change | December 25, 2010 | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volume in hectoliters | 8.505 | (3.9 | )% | 8.850 | (0.8 | )% | 8.922 | |||||||||||
Net sales | $ | 2,036.8 | (1.5 | )% | $ | 2,067.3 | 6.7 | % | $ | 1,938.2 | ||||||||
Cost of goods sold | (1,120.7 | ) | 3.0 | % | (1,087.8 | ) | 12.2 | % | (969.6 | ) | ||||||||
Gross profit | 916.1 | (6.5 | )% | 979.5 | 1.1 | % | 968.6 | |||||||||||
Marketing, general and administrative expenses | (476.5 | ) | (1.9 | )% | (485.6 | ) | (1.1 | )% | (491.1 | ) | ||||||||
Special items, net | (13.7 | ) | 18.1 | % | (11.6 | ) | (31.8 | )% | (17.0 | ) | ||||||||
Operating income (loss) | 425.9 | (11.7 | )% | 482.3 | 4.7 | % | 460.5 | |||||||||||
Other income (expense), net | (2.9 | ) | (60.8 | )% | (7.4 | ) | 13.8 | % | (6.5 | ) | ||||||||
Income (loss) from continuing operations before income taxes | $ | 423.0 | (10.9 | )% | $ | 474.9 | 4.6 | % | $ | 454.0 | ||||||||
Adjusting items: | ||||||||||||||||||
Special items | 13.7 | 18.1 | % | 11.6 | (31.8 | )% | 17.0 | |||||||||||
Non-GAAP: Underlying pre-tax income (loss) | $ | 436.7 | (10.2 | )% | $ | 486.5 | 3.3 | % | $ | 471.0 | ||||||||
Foreign currency impact on results
Our Canada segment was unfavorably impacted by a 1.5% year-over-year decrease in the value of the Canadian Dollar ("CAD") against the USD in 2012 versus 2011. This represented an approximate $11 million decrease to our 2012 USD earnings before income taxes and USD underlying pre-tax income. Our Canada segment was favorably impacted by a 4.4% year-over-year increase in the value of the CAD against the USD in 2011 versus 2010. This represented an approximate $12 million and $13 million increase to our 2011 USD earnings before income taxes and USD underlying pre-tax income, respectively.
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of other comprehensive income. Revenue and expenses are translated at the average exchange rates during the period. Gains and losses from foreign currency transactions are included in earnings for the period.
34
Volume and net sales
Our 2012 Canada sales to retail ("STRs") decreased 4.4% versus 2011. The decrease was driven by cycling the 53rd week in 2011 along with declines in Western Canada and Québec due to increased competitor price discounting in these regions. Additionally, in the second half of 2012, the National Hockey League ("NHL") lockout limited our ability to activate our established brands of Coors Light and Molson Canadian, the official beer of the NHL.
The Canadian beer industry STRs decreased approximately 2% in calendar year 2012 compared to 2011. As a result, our market share declined approximately a full share point on a full-year basis.
Our 2012 Canada sales volume decreased by 3.9% to 8.5 million hectoliters compared to 2011, driven by the decline in STRs.
Our 2012 net sales per hectoliter increased 3.9% in local currency compared to 2011, driven by positive net pricing, favorable mix and the absence of the North American Breweries, Inc. ("NAB") contract revenue in the first half of 2011.
Net sales decreased to $2,036.8 million in 2012 compared to $2,067.3 million in 2011, driven by lower sales volume and unfavorable foreign exchange rates, partially offset by the increase in net sales per hectoliter.
Our 2011 Canada STRs decreased 1.0% versus 2010. Declines in established brands offset volume gains from Keystone Lager expansion into Ontario and the introduction of Molson Canadian 67 Sublime and Rickard's Blonde, along with the continued expansion of Creemore and Granville Island to new markets. These declines were driven by increased competitor price discounting in key regions.
Canada industry volumes decreased in calendar year 2011 and our market share declined approximately a half share point on a full-year basis.
Our 2011 Canada sales volume decreased by 0.8% compared to 2010, driven by the decline in STRs.
Our 2011 net sales per hectoliter increased 3.0% in local currency compared to 2010, driven by positive net pricing and the addition of the contract brewing sales to NAB.
Net sales increased to $2,067.3 million in 2011 compared to $1,938.2 million in 2010, driven by the increase in net sales per hectoliter and favorable foreign exchange rates, partially offset by lower sales volume.
Cost of goods sold
Cost of goods sold per hectoliter in local currency increased 8.6% in 2012 versus 2011, driven by higher pension expense, input inflation, a mix shift toward higher-cost brands and packages, fixed cost deleverage from lower volume and a full year of contract brewing sales to NAB in 2012, partially offset by RFG2 savings.
Our 2011 cost of goods sold per hectoliter increased 8.4% in local currency compared to 2010, driven by input inflation, the cost of brewing beer under our NAB contract, fixed cost deleverage from lower volume, unfavorable package mix and cycling one-time cost reductions in 2010. These factors were partially offset by RFG2 savings in 2011.
Marketing, general and administrative expenses
Our 2012 marketing, general and administrative expenses decreased 0.5% in local currency versus 2011, driven by lower marketing and sales investments.
Our 2011 marketing, general and administrative expenses decreased 5.3% in local currency versus 2010, driven by lower employee incentive compensation and other overhead expenses.
Special items, net
During 2012, we recognized charges of $10.1 million relating to a restructuring program focused on labor savings across all functions. Also, during 2012 we recognized charges for pension curtailment and special termination benefits related to certain defined benefit pension plans of $5.0 million. Additionally, during 2012 we recognized a $1.4 million benefit related to the timing of insurance proceeds for flood damages in our Toronto offices.
During 2011, we recognized special termination benefit costs of $5.2 million as eligible employees elected to take early retirement. Additionally, we recognized a $7.6 million loss related to the correction of an immaterial error to adjust fixed assets resulting from the performance of a fixed asset count. We also recognized a $2.0 million gain resulting from a reduction of our guarantee of BRI's debt obligations.
35
During 2010, we recognized $12.8 million of expense related to a capital asset write-off and associated costs for the abandonment of sales support software, which had been under development. Additionally, we recognized expense for special termination benefits of $3.2 million as eligible employees elected to take early retirement and recognized $1.0 million of expense for restructuring costs. See Part II—Item 8 Financial Statements and Supplementary Data, Note 9 "Special Items" of the Notes for further discussion.
Other income (expense), net
Other expense in 2012 decreased $4.5 million compared to 2011, due to foreign currency movements. Other expense in 2011 increased $0.9 million compared to 2010, primarily due to foreign currency movements.
United States Segment
The U.S. segment consists of our interest, and results from our interest, in MillerCoors, our joint venture with SABMiller plc ("SABMiller") for all U.S. operations. MillerCoors produces, markets and sells beer brands in the U.S. and Puerto Rico. Its major brands include Coors Light, Miller Lite, Miller High Life, Keystone Light, Blue Moon, Leinenkugel's, Coors Banquet and Miller Genuine Draft. Our interest in MillerCoors is accounted for under the equity method of accounting. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5 "Investments" of the Notes for further discussion.
The following represents the results of operations for MillerCoors for the years ended December 31, 2012, December 31, 2011, and December 31, 2010.
For the years ended | ||||||||||||||||||
December 31, 2012 | % change | December 31, 2011 | % change | December 31, 2010 | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volumes in hectoliters | 76.299 | (0.5 | )% | 76.652 | (2.8 | )% | 78.823 | |||||||||||
Net sales | $ | 7,761.1 | 2.8 | % | $ | 7,550.2 | (0.3 | )% | $ | 7,570.6 | ||||||||
Cost of goods sold | (4,689.7 | ) | 0.9 | % | (4,647.9 | ) | (0.8 | )% | (4,686.3 | ) | ||||||||
Gross profit | 3,071.4 | 5.8 | % | 2,902.3 | 0.6 | % | 2,884.3 | |||||||||||
Marketing, general and administrative expenses | (1,828.5 | ) | 3.4 | % | (1,768.6 | ) | (0.4 | )% | (1,775.1 | ) | ||||||||
Special items, net | (31.8 | ) | (72.0 | )% | (113.4 | ) | N/M | (30.3 | ) | |||||||||
Operating income | 1,211.1 | 18.7 | % | 1,020.3 | (5.4 | )% | 1,078.9 | |||||||||||
Other income (expense), net | 0.3 | (75.0 | )% | 1.2 | (50.0 | )% | 2.4 | |||||||||||
Income from continuing operations before income taxes and noncontrolling interests | 1,211.4 | 18.6 | % | 1,021.5 | (5.5 | )% | 1,081.3 | |||||||||||
Income tax expense | (5.5 | ) | (26.7 | )% | (7.5 | ) | (1.3 | )% | (7.6 | ) | ||||||||
Income from continuing operations | 1,205.9 | 18.9 | % | 1,014.0 | (5.6 | )% | 1,073.7 | |||||||||||
Less: Net income attributable to noncontrolling interests | (15.0 | ) | 47.1 | % | (10.2 | ) | (38.9 | )% | (16.7 | ) | ||||||||
Net income attributable to MillerCoors | $ | 1,190.9 | 18.6 | % | $ | 1,003.8 | (5.0 | )% | $ | 1,057.0 | ||||||||
Adjusting items: | ||||||||||||||||||
Special items | 31.8 | (72.0 | )% | 113.4 | N/M | 30.3 | ||||||||||||
Tax effect on special items, net | — | (100.0 | )% | (0.4 | ) | N/M | (0.1 | ) | ||||||||||
Non-GAAP: Underlying net income attributable to MillerCoors | $ | 1,222.7 | 9.5 | % | $ | 1,116.8 | 2.7 | % | $ | 1,087.2 | ||||||||
N/M = not meaningful
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The following represents our proportional share of MillerCoors net income reported under the equity method (in millions):
For the year ended December 29, 2012 | % change | For the year ended December 31, 2011 | % change | For the year ended December 25, 2010 | ||||||||||||||
Net income attributable to MillerCoors | $ | 1,190.9 | 18.6 | % | $ | 1,003.8 | (5.0 | )% | $ | 1,057.0 | ||||||||
MCBC economic interest | 42 | % | 42 | % | 42 | % | ||||||||||||
MCBC proportionate share of MillerCoors net income | 500.2 | 18.6 | % | 421.6 | (5.0 | )% | 443.9 | |||||||||||
Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1) | 4.9 | (86.2 | )% | 35.4 | N/M | 6.9 | ||||||||||||
Share-based compensation adjustment(1) | 5.8 | N/M | 0.9 | (83.0 | )% | 5.3 | ||||||||||||
Equity Income in MillerCoors | $ | 510.9 | 11.6 | % | $ | 457.9 | 0.4 | % | $ | 456.1 | ||||||||
Adjusting items: | ||||||||||||||||||
MCBC proportionate share of MillerCoors special items | 13.4 | (71.8 | )% | 47.6 | N/M | 12.7 | ||||||||||||
Basis amortization related to Sparks brand impairment(1) | — | (100.0 | )% | (25.2 | ) | N/M | — | |||||||||||
Tax effect on special items | — | (100.0 | )% | (0.2 | ) | N/M | — | |||||||||||
Non-GAAP Equity Income in MillerCoors | $ | 524.3 | 9.2 | % | $ | 480.1 | 2.4 | % | $ | 468.8 | ||||||||
N/M = not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 5 "Investments" of the Notes, for a detailed discussion of these equity method adjustments. |
The discussion below highlights the MillerCoors results of operations for the year ended December 31, 2012, versus the year ended December 31, 2011, and for the year ended December 31, 2011, versus the year ended December 31, 2010.
Volume and net sales
MillerCoors domestic STRs declined 1.3% in 2012 versus 2011, driven by declines in Miller Lite and the below premium portfolio, partially offset by growth in Coors Light and double-digit growth in Tenth and Blake led by the Blue Moon and Leinenkugel's brands.
Total sales volume declined 0.5% in 2012 compared to 2011. Domestic sales-to-wholesalers decreased 1.1% versus 2011, driven by the decline in STRs, partially offset by increased contract brewing volume.
Domestic net sales per hectoliter increased 3.5% in 2012 compared to 2011, due to strong net pricing and brand mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 3.3% in 2012 compared to 2011.
Net sales increased to $7,761.1 million in 2012, compared to $7,550.2 million in 2011. This increase was driven by the increase in domestic net sales per hectoliter, partially offset by lower sales volume.
Adjusted for trading days, 2011 domestic STRs declined 2.3% versus 2010, driven by weak economic conditions affecting the entire industry. Declines in below premium and premium regular brands offset brand growth in Tenth and Blake. Additionally, premium light brands as a group were down slightly. Blue Moon continued growing at a double-digit rate, Coors Light was up slightly, and the remaining focus brands (Miller Lite, Miller High Life, Keystone, and MGD 64) declined.
Total sales volume declined 2.8% in 2011 compared to 2010. Domestic sales-to-wholesalers decreased 3.0% driven by the decline in STRs, and contract brewing volume was unchanged versus 2010.
Domestic net sales per hectoliter increased 2.4% in 2011 compared to 2010, due to higher domestic net pricing and favorable sales mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 2.6% in 2011 compared to 2010.
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Net sales decreased slightly to $7,550.2 million in 2011, compared to $7,570.6 million in 2010. This decrease was driven by lower sales volume largely offset by the increase in domestic net sales per hectoliter.
Cost of goods sold
Cost of goods sold per hectoliter increased 1.4% in 2012 compared to 2011, driven by the cost of packaging innovations and commodity inflation, partially offset by cost savings initiatives.
MillerCoors 2011 cost of goods sold per hectoliter increased 2.0% compared to 2010, due to higher freight, fuel and packaging costs, and fixed-cost deleverage, which were partially offset by cost savings.
Marketing, general and administrative expenses
Marketing, general and administrative expenses increased by 3.4% in 2012 versus 2011, due to increased marketing investments and spending behind new products and packaging innovations.
MillerCoors 2011 marketing, general and administrative expenses decreased by 0.4% versus 2010, driven by the one-time receipt of $14.0 million from a third party and lower marketing spending as strategic initiatives changed in 2011, specifically Coors Light changing its focus to local university alliances from the National Football League sponsorship, partially offset by higher information systems costs.
Special Items
During 2012, MillerCoors recognized special charges of $31.8 million 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 the business transformation project. Also, during 2012, MillerCoors recognized a pension curtailment gain of $2.3 million.
During 2011, MillerCoors recognized special charges totaling $113.4 million, driven primarily by a $60.0 million write-down of the value of the Sparks brand and a $50.9 million charge resulting from the planned assumption of the Milwaukee Brewery Worker's Pension Plan, an underfunded multi-employer pension plan.
During 2010, MillerCoors recognized $30.3 million of special charges driven largely by pension curtailment losses, as well as integration costs including severance and relocation costs resulting from the sales office reorganization.
38
Central Europe Segment
As a result of the Acquisition, our Central Europe segment produces and sells our brands principally in Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary and Montenegro and also sells our brands in Bosnia-Herzegovina and Slovakia. Our brand portfolio includes Jelen, Staropramen, Ozujsko, Bergenbier, Kamenitza, and Branik. We also brew and distribute Stella Artois, Beck's, Lowenbrau and Spaten under license agreements with ABI companies.
Actual and Pro Forma Results
The following represents our actual and pro forma results of operations for Central Europe for the years ended December 29, 2012, and December 31, 2011, to give effect to the Acquisition as if it had occurred at the beginning of fiscal year 2011.
For the years ended | |||||||||||||||||||
2012 | 2011 | ||||||||||||||||||
Pro Forma | Actual | Pro Forma Combined | Pro Forma | ||||||||||||||||
For the period January 1 through June 14(2) | For the period June 15 through December 29(1) | December 29, 2012(1)(2) | December 31, 2011(2) | % change | |||||||||||||||
(In millions, except percentages) | |||||||||||||||||||
Volume in hectoliters | 5.303 | 7.565 | 12.868 | 12.951 | (0.6 | )% | |||||||||||||
Net sales(3) | $ | 327.7 | $ | 481.2 | $ | 808.9 | $ | 914.1 | (11.5 | )% | |||||||||
Cost of goods sold(4) | (194.2 | ) | (277.7 | ) | (471.9 | ) | (504.7 | ) | (6.5 | )% | |||||||||
Gross profit | 133.5 | 203.5 | 337.0 | 409.4 | (17.7 | )% | |||||||||||||
Marketing, general and administrative expenses(5) | (108.8 | ) | (104.2 | ) | (213.0 | ) | (234.7 | ) | (9.2 | )% | |||||||||
Special items, net | — | (2.0 | ) | (2.0 | ) | (7.0 | ) | (71.4 | )% | ||||||||||
Operating income (loss) | 24.7 | 97.3 | 122.0 | 167.7 | (27.3 | )% | |||||||||||||
Other income (expense), net | (0.6 | ) | 0.1 | (0.5 | ) | (2.9 | ) | (82.8 | )% | ||||||||||
Income (loss) from continuing operations before income taxes | $ | 24.1 | $ | 97.4 | $ | 121.5 | $ | 164.8 | (26.3 | )% | |||||||||
Adjusting items: | |||||||||||||||||||
Special items | — | 2.0 | 2.0 | 7.0 | (71.4 | )% | |||||||||||||
Acquisition and integration related costs | (11.1 | ) | 13.0 | 1.9 | — | N/M | |||||||||||||
Non-GAAP: Underlying pre-tax income (loss) | $ | 13.0 | $ | 112.4 | $ | 125.4 | $ | 171.8 | (27.0 | )% | |||||||||
N/M = Not meaningful
(1) | Represents Central Europe results from the Acquisition date of June 15, 2012, through December 29, 2012. The results related to the Central Europe export and license business, which includes arrangements in Russia and Ukraine as well as export of Central European brands, have been moved to our MCI segment effective July 1, 2012. The impact of our Central Europe export and license business for the period from Acquisition through the end of the second quarter 2012 was immaterial and therefore, have not been recast to be included in MCI results. However, this change is reflected in the following pro forma results. On a pro forma basis, this reporting change resulted in removing net sales and income from continuing operations of $1.4 million and $0.7 million, respectively, that were earned from the Acquisition date of June 15, 2012, through June 30, 2012, that were previously reported in our Central Europe segment. |
(2) | Pro forma amounts include the results of operations for StarBev from January 1, 2012, to June 14, 2012 combined with the post-Acquisition actual results included in our consolidated financial statements subsequent to June 14, 2012, to form our pro forma combined results for the year ended December 29, 2012. Additionally, pro forma amounts include the historic StarBev results for the year ended December 31, 2011. These amounts also include pro forma adjustments as if StarBev had been acquired on December 26, 2010, the first day of our 2011 fiscal year, including the effects of acquisition accounting as described below and eliminating non-recurring costs and expenses directly related to the transaction, but do not include adjustments for costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined businesses. Pro forma amounts are not necessarily indicative of |
39
what the results would have been had we operated the businesses since December 26, 2010, nor are they indicative of the results that may be obtained in the future. Financial information for StarBev is from audited annual and unaudited interim financial information in Euros derived from StarBev's underlying books and records maintained in accordance with International Financial Reporting Standards ("IFRS") and translated to USD using quarterly average exchange rates during each period indicated. Based on our review of StarBev's historical financial statements and understanding of the differences between U.S. GAAP and IFRS, we are not aware of any 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.
(3) | StarBev's historical net sales were reduced by $25.4 million and $61.8 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, to reflect reclassifications relating primarily to the treatment of payments made to customers. Specifically, in accordance with U.S. GAAP, these customer payments are considered a reduction of net sales and, therefore, have been reclassified from marketing, general and administrative expenses. These amounts include $6.3 million and $14.1 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, that StarBev classified as amortization associated with intangible assets related to customer supply rights. |
(4) | To align StarBev to U.S. GAAP and to our accounting policies, StarBev's historical cost of goods sold were increased by $37.6 million and $101.4 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, to reflect U.S. GAAP reclassifications from the financial statements of StarBev to align their presentation with ours. This adjustment primarily relates to the reclassification of $39.0 million and $104.7 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, of distribution and logistics costs from marketing, general and administrative expenses to cost of goods sold. Additionally, there were $2.1 million and $4.7 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, of production equipment-related gains that were reclassified from marketing, general and administrative expenses to cost of goods sold. We also made pro forma adjustments to cost of goods sold for an increase of $1.7 million and a decrease of $3.2 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, resulting from the purchase price allocation for the Acquisition primarily driven by the amortization of the fair value of a favorable malting agreement within other intangibles offset in part by adjustments to decrease depreciation as a result of changes in the fair value of properties. This represents reductions in depreciation and amortization compared to previously filed pro forma information of $2.3 million and $4.9 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, as a result of updating our preliminary purchase accounting. 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. |
(5) | To align StarBev to U.S. GAAP and to our accounting policies, StarBev's marketing, general and administrative expenses were reduced by $64.6 million and $162.7 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, to reflect reclassifications from the financial statements of StarBev to align presentation with ours. Along with the reclassifications discussed in notes (3) and (4) above, $2.3 million and $0.9 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, were added to marketing, general and administrative expenses to align recognition of various other immaterial items. We also made pro forma adjustments to reduce depreciation and amortization expense by $1.5 million and $0.1 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, and the year ended December 31, 2011, respectively, to reflect the purchase price adjustments related to the valuations of properties and other intangibles. This represents increases in depreciation and amortization compared to previously filed pro forma information of $0.7 million and $1.5 million for the pre-Acquisition periods of January 1, 2012, to June 14, 2012, the and the year ended December 31, 2011, respectively, as a result of updating our preliminary purchase accounting. 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 pro forma results as there were no actual prior year results related to our Central Europe segment.
Foreign currency impact on results
During 2012, the local currencies in the countries in which our Central Europe segment operates depreciated versus the USD on an average basis versus 2011, resulting in an approximate $24 million and $25 million decrease to our pro forma 2012 USD earnings before income taxes and USD underlying pre-tax income, respectively.
40
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of other comprehensive income. Revenue and expenses are translated at the average exchange rates during the period. Gains and losses from foreign currency transactions are included in earnings for the period.
Volume and net sales
On a pro forma basis, Central Europe sales volume decreased 0.6% in 2012 compared to 2011, due to a decrease in consumer demand, the effect of destocking trade inventories in Romania and Serbia, and a focus on maintaining price growth in all markets.
The business maintained its market share in the region during the year, excluding the effect of trade destocking.
Pro forma net sales per hectoliter increased 2.2% in local currency in 2012 compared to 2011, due to positive net pricing and brand mix.
Cost of goods sold
On a pro forma basis, cost of goods sold per hectoliter increased 7.2% in local currency in 2012 compared to 2011, primarily driven by package mix changes and input inflation, specifically brewing materials, utilities and fuel.
Marketing, general and administrative expenses
Pro forma marketing, general and administrative expenses increased 2.9% in local currency in 2012 compared to 2011, due to increased marketing behind product innovation, as well as increased bad debt expenses.
Special items, net
During 2012, we recognized restructuring charges of $2.0 million, on a pro forma basis.
During 2011, we recognized special charges of $7.0 million, on a pro forma basis, primarily related to restructuring and special termination benefits.
Other income (expense), net
On a pro forma basis, other expense decreased $2.4 million in 2012 compared to 2011, due to foreign currency movements.
41
United Kingdom Segment
The U.K. segment consists of our production, marketing and sales of our brands (the largest of which is Carling) principally in the U.K. and the Republic of Ireland; our consolidated joint venture arrangement to produce, import and distribute the Grolsch brands in the U.K. and the Republic of Ireland; our consolidated joint venture agreement to produce and distribute the Cobra brands in the U.K. and the Republic of Ireland; factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by us) in the U.K.; and our joint venture arrangement with DHL ("Tradeteam") for the distribution of products throughout the U.K. accounted for under the equity method. We also distribute the Modelo brands, including Corona, pursuant to a distribution agreement with Modelo. In addition, we contract manufacture for Heineken U.K. and Carlsberg U.K.
The following represents our results of operations for the U.K. for the years ended December 29, 2012, December 31, 2011, and December 25, 2010.
For the years ended | ||||||||||||||||||
December 29, 2012 | % change | December 31, 2011 | % change | December 25, 2010 | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volume in hectoliters(1) | 8.331 | (9.0 | )% | 9.151 | 3.2 | % | 8.870 | |||||||||||
Net sales(1) | $ | 1,266.3 | (5.0 | )% | $ | 1,333.5 | 8.0 | % | $ | 1,234.9 | ||||||||
Cost of goods sold | (882.2 | ) | (0.6 | )% | (887.4 | ) | 12.0 | % | (792.6 | ) | ||||||||
Gross profit | 384.1 | (13.9 | )% | 446.1 | 0.9 | % | 442.3 | |||||||||||
Marketing, general and administrative expenses | (327.2 | ) | (7.2 | )% | (352.6 | ) | 1.0 | % | (349.2 | ) | ||||||||
Special items, net | (21.5 | ) | N/M | 0.3 | N/M | (3.1 | ) | |||||||||||
Operating income (loss) | 35.4 | (62.3 | )% | 93.8 | 4.2 | % | 90.0 | |||||||||||
Interest income(2) | 5.7 | (9.5 | )% | 6.3 | (6.0 | )% | 6.7 | |||||||||||
Other income (expense), net | (2.3 | ) | 187.5 | % | (0.8 | ) | (42.9 | )% | (1.4 | ) | ||||||||
Income (loss) from continuing operations before income taxes | $ | 38.8 | (60.9 | )% | $ | 99.3 | 4.2 | % | $ | 95.3 | ||||||||
Adjusting items: | ||||||||||||||||||
Special items | 21.5 | N/M | (0.3 | ) | (109.7 | )% | 3.1 | |||||||||||
Other non-core items | (0.7 | ) | (128.0 | )% | 2.5 | N/M | — | |||||||||||
Non-GAAP: Underlying pre-tax income (loss) | $ | 59.6 | (41.3 | )% | $ | 101.5 | 3.2 | % | $ | 98.4 | ||||||||
N/M = Not meaningful
(1) | Reflects gross segment sales and for 2012 and 2011 includes intercompany sales to MCI of 0.246 million hectoliters and 0.152 million hectoliters, respectively and $16.0 million of net sales and $9.0 million of net sales, respectively. The offset is included within MCI cost of goods sold. These amounts are eliminated in the consolidated totals. |
(2) | Interest income is earned on trade loans to U.K. on-premise customers and is typically driven by note receivable balances outstanding from period-to-period. |
Foreign currency impact on results
Our U.K. segment results were unfavorably impacted by a 1.0% year-over-year decrease in the value of the British Pound ("GBP") against the USD in 2012 versus 2011. This represented an approximate $1 million and $2 million decrease to our 2012 USD earnings before income taxes and USD underlying pre-tax income, respectively. Our U.K. segment was favorably impacted by a 4.2% year-over-year increase in the value of the GBP against the USD in 2011 versus 2010. This represented an approximate $4 million increase to both USD earnings before income taxes and USD underlying pre-tax income in 2011 versus 2010.
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.
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Volume and net sales
Our 2012 U.K. STRs decreased 9.8% compared to 2011, due to a weak U.K. market impacted by economic conditions, cycling the 53rd week in 2011 and a strong volume performance in the fourth quarter of 2011 partially driven by customer buy-in ahead of our January 2012 price increase. Market share decreased nearly one share point in 2012 with the U.K. beer industry decreasing approximately 5%.
Our 2012 U.K. sales volume decreased 9.0% to 8.3 million hectoliters compared to 2011, driven by the decline in STRs.
Our 2012 net sales per hectoliter increased 5.3% in local currency versus 2011, due to higher on-premise channel pricing, favorable channel mix and an increase in contract production sales, partially offset by lower pricing in the off-premise channel.
Net sales decreased to $1,266.3 million in 2012 compared to $1,333.5 million in 2011, driven by lower sales volume and unfavorable foreign exchange rates, partially offset by the increase in net sales per hectoliter.
STRs for our U.K. segment increased 1.6% in 2011 versus 2010, driven by the addition of the Modelo brands and Sharp's brands.
2011 U.K. sales volume increased 3.2% to 9.2 million hectoliters compared to 2010, driven by the increase in STRs.
Net sales per hectoliter for 2011 increased 0.7% in local currency versus 2010, driven by positive sales mix, especially the addition of the higher-priced Modelo brands, partially offset by lower net pricing.
Net sales increased to $1,333.5 million in 2011, compared to $1,234.9 million in 2010, driven by the increase in net sales per hectoliter, higher sales volume and favorable foreign exchange rates.
Cost of goods sold
Cost of goods sold per hectoliter in local currency increased by 10.2% in 2012 compared to 2011, driven by input inflation, higher pension expense, unfavorable package mix and fixed cost deleverage from lower volume.
Cost of goods sold per hectoliter in local currency increased by 4.6% in 2011 versus 2010, primarily due to the addition of the Modelo brands along with input inflation.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased 6.2% in local currency in 2012 compared to 2011, due to cost reduction initiatives and lower marketing investments, partially offset by higher pension expense.
Marketing, general and administrative expenses in local currency decreased by 2.8% in 2011 versus 2010, driven by lower employee incentive compensation and lower pension expense, partially offset by higher marketing spending.
Special items, net
During 2012, we recognized employee termination costs of $17.8 million related to a restructuring program focused on labor savings across all functions. Also, we recognized an asset abandonment charge of $7.2 million related to the discontinuation of primary packaging. We determined that the Home Draft package was not meeting expectations, and as a result, we recognized a loss related to the write-off of the Home Draft packaging line, tooling equipment, and packaging materials. Additionally, we recognized a $3.5 million gain related to a release of a portion of a non-income-related-tax reserve that was recorded as a special item in 2009.
During 2011, we recognized employee termination costs of $2.1 million related to supply chain restructuring activity and company-wide efforts to increase efficiency in operations. Additionally, we recognized a $2.3 million gain primarily related to a release of a portion of a non-income-related-tax reserve that was recorded as a special item in 2009.
During 2010, we recognized $2.6 million of employee termination costs related to restructuring activity resulting from on-going company-wide efforts to increase efficiency throughout the business. See Part II—Item 8 Financial Statements and Supplementary Data, Note 9 "Special Items" of the Notes for further discussion.
Other income (expense), net
We incurred other expense of $2.3 million, $0.8 million and $1.4 million in 2012, 2011 and 2010, respectively. The 2012 other expense is due primarily to foreign currency movements and leasehold costs. The 2011 and 2010 other expense is primarily due to leasehold costs.
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Interest income
Interest income is earned on trade loans to U.K. on-premise customers. Interest income in local currency declined 9.6% and 9.2% in 2012 and 2011, respectively. The declines in both 2012 and 2011 were due to reductions in trade loan balances.
Molson Coors International Segment
Our MCI segment is focused on growing our business and brand portfolios in key emerging and growth markets outside of the U.S., U.K., Canada and Central Europe, including Asia, continental Europe (outside of Central Europe), Mexico, Latin America and the Caribbean. This segment includes our Molson Coors Cobra India ("MC Cobra India") joint venture, our agreement in India with Cobra India. Beginning July 1, 2012, our Central Europe export and license business, which includes the licensing arrangements with ABI to brew and distribute our products in Russia and Ukraine, export arrangements with Carlsberg in the U.K. and Sweden and with ABI in Germany, Canada and Italy, and other export arrangements in various other countries, is being reported in our MCI segment.
The following represents our results of operations for MCI for the years ended December 29, 2012, December 31, 2011, and December 25, 2010.
For the years ended | ||||||||||||||||||
December 29, 2012(1) | % change | December 31, 2011 | % change | December 25, 2010 | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volume in hectoliters(2) | 1.188 | 17.4 | % | 1.012 | 50.6 | % | 0.672 | |||||||||||
Net sales | $ | 147.0 | 19.9 | % | $ | 122.6 | ||||||||||||