Investments
Our investments include both equity method and consolidated investments. Those entities identified as VIEs have been evaluated to determine whether we are the primary beneficiary. The VIEs included under "Consolidated VIEs" below are those for which we have concluded that we are the primary beneficiary and accordingly, consolidate these entities. None of our consolidated VIEs held debt as of December 31, 2013, or December 29, 2012. We have not provided any financial support to any of our VIEs during the fiscal year 2013 that we were not previously contractually obligated to provide. Amounts due to and due from our equity method investments are recorded as affiliate accounts payable and affiliate accounts receivable.
Authoritative guidance related to the consolidation of VIEs requires that we continually reassess whether we are the primary beneficiary of VIEs in which we have an interest. As such, the conclusion regarding the primary beneficiary status is subject to change and we continually evaluate circumstances that could require consolidation or deconsolidation. As of December 31, 2013, and December 29, 2012, our consolidated VIEs are Cobra Beer Partnership, Ltd. ("Cobra U.K.") and Grolsch and our unconsolidated VIEs are BRI, BDL and MMI. See further discussion below.
Equity Investments
Investment in MillerCoors
MillerCoors has a Board of Directors consisting of five MCBC appointed and five SABMiller appointed directors. The percentage interests in the profits of MillerCoors are 58% for SABMiller and 42% for MCBC, and voting interests are shared 50% - 50%. Each party to the MillerCoors joint venture agreed not to transfer its economic or voting interests in the joint venture for a period of five years from July 1, 2008. With the expiration of the restriction in 2013, both parties to the joint venture are now able to transfer their economic and voting interest, however, certain rights of first refusal will apply to any assignment of such interests. Our interest in MillerCoors is accounted for under the equity method of accounting.
Summarized financial information for MillerCoors is as follows:
Condensed Balance Sheets
|
| | | | | | | |
| As of |
| December 31, 2013 | | December 31, 2012 |
| (In millions) |
Current assets | $ | 798.4 |
| | $ | 841.4 |
|
Non-current assets | 8,989.3 |
| | 8,949.9 |
|
Total assets | $ | 9,787.7 |
| | $ | 9,791.3 |
|
Current liabilities | $ | 950.1 |
| | $ | 958.5 |
|
Non-current liabilities | 1,346.2 |
| | 1,537.5 |
|
Total liabilities | 2,296.3 |
| | 2,496.0 |
|
Noncontrolling interests | 20.7 |
| | 28.4 |
|
Owners' equity | 7,470.7 |
| | 7,266.9 |
|
Total liabilities and equity | $ | 9,787.7 |
| | $ | 9,791.3 |
|
The following represents our proportional share in MillerCoors' equity:
|
| | | | | | | |
| As of |
| December 31, 2013 | | December 31, 2012 |
| (In millions, except percentages) |
MillerCoors owners' equity | $ | 7,470.7 |
| | $ | 7,266.9 |
|
MCBC economic interest | 42 | % | | 42 | % |
MCBC proportionate share in MillerCoors' equity | 3,137.7 |
| | 3,052.1 |
|
Difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1) | (666.2 | ) | | (670.8 | ) |
Accounting policy elections | 35.0 |
| | 35.0 |
|
Timing differences of cash contributions and distributions as a result of different fiscal periods | — |
| | 15.5 |
|
Investment in MillerCoors | $ | 2,506.5 |
| | $ | 2,431.8 |
|
| |
(1) | Our net investment in MillerCoors is based on the carrying values of the net assets contributed to the joint venture which is less than our proportional share of underlying equity (42%) of MillerCoors (contributed by both Coors Brewing Company ("CBC") and Miller Brewing Company ("Miller")). This basis difference, with the exception of certain non-amortizing items (goodwill, land, etc.), is being amortized as additional equity income over the remaining useful lives of the contributed long-lived amortizing assets. |
Results of Operations
|
| | | | | | | | | | | |
| For the years ended |
| December 31, 2013 | | December 31, 2012 | | December 31, 2011 |
| (In millions) |
Net sales | $ | 7,800.8 |
| | $ | 7,761.1 |
| | $ | 7,550.2 |
|
Cost of goods sold | (4,723.7 | ) | | (4,689.7 | ) | | (4,647.9 | ) |
Gross profit | $ | 3,077.1 |
| | $ | 3,071.4 |
| | $ | 2,902.3 |
|
Operating income(1) | $ | 1,287.4 |
| | $ | 1,211.1 |
| | $ | 1,020.3 |
|
Net income attributable to MillerCoors(1) | $ | 1,270.5 |
| | $ | 1,190.9 |
| | $ | 1,003.8 |
|
| |
(1) | Fiscal year 2013 includes special charges related to restructuring activities and asset write-offs of $17.2 million and $2.6 million, respectively. Fiscal year 2012 includes special charges of $31.8 million primarily due to the write-down of assets related to discontinuing the production of the Home Draft package in the U.S. and the write-down of information systems assets related to a business transformation project. Fiscal year 2011 includes special charges of $60.0 million for a write-down in 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 under-funded multi-employer pension plan, as well as charges related to consulting, relocation and other integration costs. |
The following represents our proportional share in MillerCoors' net income, reported under the equity method:
|
| | | | | | | | | | | |
| For the years ended |
| December 31, 2013 | | December 31, 2012 | | December 31, 2011 |
| (In millions, except percentages) |
Net income attributable to MillerCoors | $ | 1,270.5 |
| | $ | 1,190.9 |
| | $ | 1,003.8 |
|
MCBC economic interest | 42 | % | | 42 | % | | 42 | % |
MCBC proportionate share of MillerCoors net income | 533.6 |
| | 500.2 |
| | 421.6 |
|
Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors | 4.6 |
| | 4.9 |
| | 35.4 |
|
Share-based compensation adjustment(1) | 0.8 |
| | 5.8 |
| | 0.9 |
|
Equity income in MillerCoors | $ | 539.0 |
| | $ | 510.9 |
| | $ | 457.9 |
|
| |
(1) | The net adjustment is to record all share-based compensation associated with pre-existing equity awards to be settled in Class B common stock held by former employees now employed by MillerCoors and to eliminate all share-based compensation impacts related to pre-existing SABMiller equity awards held by former Miller employees now employed by MillerCoors. As of the end of the second quarter of 2011, the share-based awards granted to former CBC employees now employed by MillerCoors became fully vested. As such, no further adjustments will be recorded related to these awards. We are still recording adjustments to eliminate the impacts related to the pre-existing SABMiller equity awards, which represent the amounts recorded in 2013 and 2012. |
The following table summarizes our transactions with MillerCoors:
|
| | | | | | | | | | | |
| For the years ended |
| December 31, 2013 | | December 29, 2012 | | December 31, 2011 |
| (In millions) |
Beer sales to MillerCoors | $ | 16.6 |
| | $ | 18.9 |
| | $ | 28.2 |
|
Beer purchases from MillerCoors | $ | 19.2 |
| | $ | 13.1 |
| | $ | 11.5 |
|
Service agreement costs and other charges to MillerCoors | $ | 2.5 |
| | $ | 3.7 |
| | $ | 6.0 |
|
Service agreement costs and other charges from MillerCoors | $ | 1.1 |
| | $ | 1.2 |
| | $ | 1.3 |
|
As of December 31, 2013, and December 29, 2012, we had $4.4 million and $0.8 million net payables due to MillerCoors, respectively.
We assigned the United States and Puerto Rican rights to the legacy Coors brands, including Coors Light, Coors Banquet, Keystone Light and the Blue Moon brands, to MillerCoors. We retained all ownership rights of these brands outside of the United States and Puerto Rico. In addition, we retained numerous water rights in Colorado. We lease these water rights to MillerCoors at no cost for use at its Golden, Colorado brewery.
There were no undistributed earnings in MillerCoors as of December 31, 2013, or December 29, 2012.
Other Equity Investments
Brewers' Retail Inc.
BRI, a VIE, is a beer distribution and retail network for the Ontario region of Canada, owned by MCBC, ABI and Sleeman. BRI charges its owners administrative fees that are designed so the entity operates at break-even profit levels. This administrative fee is based on costs incurred, net of other revenues earned, and is allocated in accordance with the operating agreement to its owners based on volume of products. Contractual provisions cause our interests to fluctuate based on this calculated market share requiring frequent primary beneficiary evaluations. However, based on the existing structure, control is shared, and remains shared through changes in interest, and therefore we do not anticipate becoming the primary beneficiary in the foreseeable future.
We have an obligation to proportionately fund BRI's operations. As a result of this obligation, we continue to record our proportional share of BRI's net income or loss and OCI activity, including when we have a negative equity method balance. As of December 31, 2013, we had an equity method investment balance of $13.6 million and as of December 29, 2012, we had a negative equity method balance of $41.9 million. The increase to our net investment balance was primarily driven by a decrease to BRI's employee retirement plan obligations (resulting from the annual actuarial valuation) positively impacting the net assets of BRI. Administrative fees under the agreement with BRI were approximately $118.1 million, $124.3 million and $99.5 million for fiscal years 2013, 2012 and 2011, respectively, recorded in cost of goods sold. As of December 31, 2013, and December 29, 2012, we had net receivables of $29.1 million and $37.9 million due from BRI related to trade receivables for sales to external customers and costs incurred by BRI offset by administrative fees charged and paid by MCBC (which may be in a payable or receivable position depending on the amount under or over charged), respectively.
Brewers' Distributor Ltd.
BDL, a VIE, is a distribution operation owned by MCBC and ABI and pursuant to an operating agreement, acts as an agent for the distribution of their products in the western provinces of Canada. The two owners share 50% - 50% voting control of this business.
BDL charges the owners administrative fees that are designed so the entity operates at break-even profit levels. This administrative fee is based on costs incurred, net of other revenues earned, and is allocated in accordance with the operating agreement to the owners based on volume of products. No other parties are allowed to sell beer through BDL, which does not take legal title to the beer distributed for the owners. As of December 31, 2013, and December 29, 2012, our investment in BDL was $15.4 million and $8.4 million, respectively. The increase in our investment was primarily related to a decrease in BDL's employee retirement plan obligation (resulting from the annual actuarial valuation) positively impacting the net assets of BDL. Administrative fees under the contract were approximately $59.6 million, $61.9 million, and $41.6 million for the fiscal years 2013, 2012 and 2011, respectively, recorded in cost of goods sold. As of December 31, 2013, we had net payables of $3.5 million to BDL and as of December 29, 2012, we had net receivables of $9.1 million due from BDL, related to trade receivables for sales to external customers and costs incurred by BDL offset by administrative fees charged and paid by MCBC (which may be in a payable or receivable position depending on the amount under or over charged).
Modelo Molson Imports, L.P.
MMI, a 50% - 50% joint venture with Grupo Modelo S.A.B. de C.V. ("Modelo"), imports, distributes, and markets the Modelo beer brand portfolio across all Canadian provinces and territories. Our sales team is responsible for selling the brands across Canada on behalf of the joint venture. We account for MMI, a VIE, under the equity method of accounting.
On November 5, 2013, ABI and MCBC entered into an agreement providing for the accelerated termination of the MMI joint venture. The joint venture was originally a 10 year agreement ending January 1, 2018. In June 2013, ABI completed its combination with Modelo, including Modelo’s interest in MMI. Following negotiations with ABI, MCC shall receive a CAD 70 million payment in exchange for the consent to change, effective upon closing and the successful completion of the transition period, the termination date in the various joint venture agreements from January 1, 2018, to end of day on February 28, 2014. Similarly, in conjunction with these negotiations, ABI has also agreed that we will continue to represent the Modelo brands in the U.K. and Japan through the end of 2014.
During the transition period, from November 5, 2013, through February 28, 2014, MMI will continue, in its current capacity, to import, distribute, and market the Modelo beer brand portfolio across Canada in the ordinary course. Following the transition period, Modelo will pay MCC the CAD 70 million early termination payment accelerating the termination of the joint venture to end of day on February 28, 2014. As a result, effective end of day on February 28, 2014, MMI will cease all operations and will ultimately be dissolved. As part of the early termination agreement, the book value of the joint venture’s net assets will then be distributed to the respective joint venture partners for the owners’ proportionate ownership interest. As of December 31, 2013, our consolidated balance sheet includes our investment in MMI of $21.2 million, an affiliate net payable to MMI of $13.8 million and a definite-lived intangible asset of $5.4 million. During the fiscal years ended 2013, 2012, and 2011, MCC recognized equity earnings of $11.7 million, $12.0 million and $15.4 million, respectively, under the MMI arrangement recorded within cost of goods sold. In addition to the equity earnings, during the fiscal years ended 2013, 2012 and 2011, MCC recognized fixed and variable marketing and administrative cost recoveries related to the promotion, sale and distribution of Modelo products under our agency and services agreement with MMI of $11.3 million, $12.5 million and $11.3 million, respectively. These cost recoveries are recorded within marketing, general and administrative expenses.
Upon completion of the transition period and receipt of the CAD 70 million early termination payment, the termination will be effective, which is expected to occur at the end of the day on February 28, 2014. At termination, we expect to recognize the termination fee income of CAD 70 million, net of the remaining carrying value of the definite-lived intangible asset, within special items. Subsequently, upon distribution of our proportionate share of the net assets of the joint venture, we will derecognize our equity investment within other non-current assets and recognize a gain (loss), if any, within special items resulting from the excess (deficit) of the total proceeds, consisting of our proportionate ownership interest in the book value of the joint venture’s assets, over our equity investment and joint venture related net asset balances upon final distribution.
Our other equity method investments are not considered significant for disclosure of financial information on either an individual or aggregated basis and there were no significant undistributed earnings as of December 31, 2013, or December 29, 2012, for any of these companies.
Consolidated VIEs
Grolsch
Grolsch is a joint venture between us and Royal Grolsch N.V. (a member of the SABMiller group) in which we hold a 49% interest. The Grolsch joint venture markets Grolsch brands in the U.K. and the Republic of Ireland. The majority of the Grolsch brands are produced by us under a contract brewing arrangement with the joint venture. MCBC and Royal Grolsch N.V. sell beer to the joint venture, which sells the beer back to MCBC (for onward sale to customers) for a price equal to what it paid, plus a marketing and overhead charge and a profit margin. Grolsch is a taxable entity in Europe. Accordingly, income tax expense in our consolidated statements of operations includes taxes related to the entire income of the joint venture. We consolidate the results and financial position of Grolsch and it is reported within our Europe operating segment.
Cobra Beer Partnership, Ltd
We hold a 50.1% interest in Cobra U.K., which owns the worldwide rights to the Cobra beer brand (with the exception of the Indian sub-continent, owned by Cobra India). The noncontrolling interest is held by the founder of the Cobra beer brand. We consolidate the results and financial position of Cobra U.K., and it is reported within our Europe operating segment.
The following summarizes the assets and liabilities of our consolidated VIEs (including noncontrolling interests).
|
| | | | | | | | | | | | | | | |
| As of |
| December 31, 2013 | | December 29, 2012 |
| Total Assets | | Total Liabilities | | Total Assets | | Total Liabilities |
| (In millions) |
Grolsch | $ | 5.6 |
| | $ | 1.7 |
| | $ | 10.0 |
| | $ | 5.6 |
|
Cobra U.K. | $ | 36.5 |
| | $ | 1.9 |
| | $ | 33.2 |
| | $ | 3.3 |
|
Sale of Investments
Tradeteam Ltd.
On December 23, 2013, we early terminated our existing distribution agreements with Tradeteam, our joint venture with DHL, and varied or terminated certain other agreements with Tradeteam and DHL, which had collectively provided Tradeteam the exclusive rights to provide our transportation and logistics services in the U.K. We made an early termination payment of approximately $40 million upon exiting and varying these agreements. Concurrently, we entered into new distribution agreements with Tradeteam resulting in future distribution cost savings achieved through market competitive pricing and improved payment terms through the agreements' new 10 year term.
Subsequently, on December 30, 2013, we executed a sale and purchase agreement for the termination of the joint venture and sale of our 49.9% interest in Tradeteam to DHL for proceeds of $29.5 million. The finalized purchase price is subject to certain working capital adjustments, which are expected to be finalized in the first quarter of 2014 and are anticipated to be immaterial.
As a result of the continuing involvement with Tradeteam following the termination and sale through the new distribution agreements, $19.8 million is considered an upfront payment for the benefits to be provided under the new agreement. As a result of the effective modification to our agreements we have concluded that the upfront payment should be recorded as an asset and amortized over the 10 year term of the new distribution agreements. The remaining net proceeds of $9.7 million were used in determining the loss on sale of the investment based on its carrying value at sale, resulting in a loss of $13.2 million recognized as a special item.
The financial commitments on early termination of the new secondary distribution agreement are to essentially assume and settle liabilities related to the various assets and infrastructure required to deliver the service to us, and to compensate Tradeteam, depending on the circumstances of such early termination. These early termination commitments decline over the term of the new agreement, and are calculable by reference to the circumstances of termination. Services provided under the Tradeteam contract were approximately $126.9 million, $128.5 million, and $130.7 million for the fiscal years ended 2013, 2012 and 2011, respectively, and are included in cost of goods sold. As of December 31, 2013, and December 29, 2012, we had $18.5 million and $14.6 million, respectively, due to Tradeteam for services provided. Additionally, as of December 29, 2012, our consolidated balance sheet includes our investment in Tradeteam of $17.7 million. During the fiscal years ended 2013, 2012 and 2011, we recognized equity earnings from our Tradeteam investment of $4.6 million, $6.0 million and $6.4 million, respectively, which are recorded within cost of goods sold.
MC Si'hai
Since its inception, the performance of the MC Si'hai joint venture did not meet our expectations due to delays in executing its business plans as well as significant difficulties in working with our business partner. Through the on-going arbitration process, which began in 2012 as discussed below, we began discussions with the joint venture partner and concluded upon a price that we would accept to exit the relationship through the sale of our interest in the joint venture. As a result, in December 2013, we sold our interest in the joint venture and, upon finalizing the sale, we recognized a gain of $6.0 million, recorded as a special item. The gain consists of the non-cash release of the $5.4 million liability remaining upon deconsolidation in 2012, as further discussed below, as well as $0.6 million of proceeds received upon closing of the sale. We also recognized legal and related fees in relation to the sale of $1.2 million during 2013.
In 2012, we recorded impairment charges related to the goodwill and definite-lived intangible assets in the joint venture, as well as concluded that we had lost our ability to exercise control of the joint venture which led to the deconsolidation of the joint venture. Specifically, due to the ongoing operational challenges of the joint venture, coupled with the impact of increased competitive pressures in China, we evaluated and subsequently impaired the full amount of the goodwill and definite-lived brand and distribution rights intangible assets recorded in relation to the joint venture. As a result, we recognized charges recorded as special items of $9.5 million and $0.9 million related to the goodwill and intangible asset impairments, respectively. Further, following the impairment, a number of events occurred that caused us to re-assess the consolidation of the joint venture. Specifically, due to the actions of our joint venture partner, we entered into arbitration for the termination and proposed liquidation of the joint venture. This resulted in a loss of our ability to exercise legal or operational control over the joint venture in accordance with the terms of the joint venture agreement. As a result, we deconsolidated the joint venture during the third quarter of 2012. Upon deconsolidation, the fair value of the remaining investment was a liability of $5.4 million representing our share of the joint venture's liabilities at termination of the joint venture, resulting in an impairment loss of $27.6 million recorded as a special item in the third quarter of 2012.
