MOLSON COORS BREWING CO, 10-Q filed on 11/8/2012
Quarterly Report
Document and Entity Information Document
9 Months Ended
Sep. 29, 2012
Nov. 2, 2012
Class A common stock, voting
Nov. 2, 2012
Class B common stock, non-voting
Nov. 2, 2012
Class A exchangeable shares
Nov. 2, 2012
Class B exchangeable shares
Document Information [Line Items]
 
 
 
 
 
Entity Registrant Name
MOLSON COORS BREWING CO 
 
 
 
 
Entity Central Index Key
0000024545 
 
 
 
 
Document Type
10-Q 
 
 
 
 
Document Period End Date
Sep. 29, 2012 
 
 
 
 
Amendment Flag
false 
 
 
 
 
Current Fiscal Year End Date
--12-29 
 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
 
Entity Common Stock, Shares Outstanding
 
2,566,694 
156,446,373 
 
 
Entity Exchangeable Shares Outstanding
 
 
 
2,933,660 
19,266,853 
Document Fiscal Year Focus
2012 
 
 
 
 
Document Fiscal Period Focus
Q3 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 29, 2012
Sep. 24, 2011
Sep. 29, 2012
Sep. 24, 2011
Sales
$ 1,685.8 
$ 1,393.9 
$ 4,134.8 
$ 3,774.3 
Excise taxes
(490.3)
(439.5)
(1,248.5)
(1,195.9)
Net sales
1,195.5 
954.4 
2,886.3 
2,578.4 
Cost of goods sold
(687.0)
(550.5)
(1,705.9)
(1,501.6)
Gross profit
508.5 
403.9 
1,180.4 
1,076.8 
Marketing, general and administrative expenses
(300.6)
(248.2)
(853.6)
(759.1)
Special items, net
(35.9)
(0.1)
(58.6)
(11.1)
Equity income in MillerCoors
132.0 
99.4 
436.5 
372.4 
Operating income (loss)
304.0 
255.0 
704.7 
679.0 
Interest income (expense), net
(54.4)
(27.3)
(162.8)
(81.8)
Other income (expense), net
(6.4)
(2.3)
(78.3)
(4.8)
Income (loss) from continuing operations before income taxes
243.2 
225.4 
463.6 
592.4 
Income tax benefit (expense)
(42.5)
(31.1)
(85.7)
(90.4)
Net Income (loss) from continuing operations
200.7 
194.3 
377.9 
502.0 
Income (loss) from discontinued operations, net of tax
0.7 
2.7 
1.6 
1.5 
Net income (loss) including noncontrolling interests
201.4 
197.0 
379.5 
503.5 
Less: Net (income) loss attributable to noncontrolling interests
(3.0)
0.4 
3.5 
(0.4)
Net income (loss) attributable to Molson Coors Brewing Company
198.4 
197.4 
383.0 
503.1 
Basic net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
 
From continuing operations (in dollars per share)
$ 1.09 
$ 1.05 
$ 2.11 
$ 2.69 
From discontinued operations (in dollars per share)
$ 0.00 
$ 0.01 
$ 0.01 
$ 0.01 
Basic net income per share (in dollars per share)
$ 1.09 
$ 1.06 
$ 2.12 
$ 2.70 
Diluted net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
 
From continuing operations (in dollars per share)
$ 1.09 
$ 1.05 
$ 2.10 
$ 2.67 
From discontinued operations (in dollars per share)
$ 0.00 
$ 0.01 
$ 0.01 
$ 0.01 
Diluted net income per share (in dollars per share)
$ 1.09 
$ 1.06 
$ 2.11 
$ 2.68 
Weighted average shares - basic (in shares)
181.0 
185.0 
180.7 
186.3 
Weighted average shares - diluted (in shares)
182.0 
186.2 
181.7 
187.8 
Amounts attributable to Molson Coors Brewing Company
 
 
 
 
Net income (loss) from continuing operations
197.7 
194.7 
381.4 
501.6 
Income (loss) from discontinued operations, net of tax
0.7 
2.7 
1.6 
1.5 
Net income (loss) attributable to Molson Coors Brewing Company
$ 198.4 
$ 197.4 
$ 383.0 
$ 503.1 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 29, 2012
Sep. 24, 2011
Sep. 29, 2012
Sep. 24, 2011
Net income (loss) including noncontrolling interests
$ 201.4 
$ 197.0 
$ 379.5 
$ 503.5 
Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
258.3 
(122.6)
301.9 
4.4 
Amortization of net prior service costs and net actuarial losses
6.5 
5.6 
22.0 
6.4 
Unrealized (loss) gain on derivative instruments
(21.3)
29.1 
(31.5)
23.0 
Reclassification adjustment on derivative instruments
4.1 
(15.8)
7.6 
(8.6)
Ownership share of unconsolidated subsidiaries' other comprehensive income (loss)
15.7 
(15.7)
25.0 
(6.8)
Total other comprehensive income (loss), net of tax
263.3 
(119.4)
325.0 
18.4 
Comprehensive income (loss)
464.7 
77.6 
704.5 
521.9 
Less: Comprehensive income (loss) attributable to the noncontrolling interest
(3.0)
0.4 
3.5 
(0.4)
Comprehensive income (loss) attributable to MCBC
$ 461.7 
$ 78.0 
$ 708.0 
$ 521.5 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Sep. 29, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 585.7 
$ 1,078.9 
Accounts receivable, net
642.6 
588.8 
Other receivables, net
127.1 
137.2 
Inventories:
 
 
Finished, net
178.1 
140.7 
In process
25.8 
15.3 
Raw materials
48.5 
41.8 
Packaging materials, net
13.4 
9.4 
Total inventories, net
265.8 
207.2 
Other assets, net
130.2 
94.0 
Deferred tax assets
29.4 
11.6 
Discontinued operations
0.3 
Total current assets
1,780.8 
2,118.0 
Properties, net
2,001.0 
1,430.1 
Goodwill
2,415.6 
1,453.3 
Other intangibles, net
7,226.9 
4,586.0 
Investment in MillerCoors
2,626.6 
2,487.9 
Deferred tax assets
161.5 
149.9 
Notes receivable, net
27.6 
32.7 
Other assets
226.5 
165.9 
Total assets
16,466.5 
12,423.8 
Current liabilities :
 
 
Accounts payable
488.9 
301.2 
Accrued expenses and other liabilities
788.2 
646.8 
Derivative hedging instruments
9.8 
107.6 
Deferred tax liabilities
171.8 
161.3 
Current portion of long-term debt and short-term borrowings
1,258.6 
46.9 
Discontinued operations
7.9 
13.4 
Total current liabilities
2,725.2 
1,277.2 
Long-term debt
3,438.1 
1,914.9 
Pension and post-retirement benefits
696.6 
697.5 
Derivative hedging instruments
226.5 
212.5 
Deferred tax liabilities
903.6 
455.6 
Unrecognized tax benefits
95.8 
76.4 
Other liabilities
81.3 
77.5 
Discontinued operations
20.2 
22.0 
Total liabilities
8,187.3 
4,733.6 
Commitments and contingencies (Note 16)
   
   
Capital stock:
 
 
Preferred stock, non-voting, no par value (authorized: 25.0 shares; none issued)
Paid-in capital
3,615.4 
3,572.1 
Retained earnings
3,898.7 
3,689.7 
Accumulated other comprehensive income (loss)
195.3 
(129.7)
Class B common stock held in treasury at cost (7.5 shares at September 29, 2012 and December 31, 2011)
(321.1)
(321.1)
Total Molson Coors Brewing Company stockholders' equity
8,225.2 
7,647.9 
Noncontrolling interests
54.0 
42.3 
Total equity
8,279.2 
7,690.2 
Total liabilities and equity
16,466.5 
12,423.8 
Class A common stock, voting
 
 
Capital stock:
 
 
Common stock
Class B common stock, non-voting
 
 
Capital stock:
 
 
Common stock
1.6 
1.6 
Class A exchangeable shares
 
 
Capital stock:
 
 
Exchangeable shares
110.5 
110.5 
Class B exchangeable shares
 
 
Capital stock:
 
 
Exchangeable shares
$ 724.8 
$ 724.8 
CONDENSED CONSOLIDATED BALANCE SHEETS (PARENTHETICAL) (USD $)
In Millions, except Per Share data, unless otherwise specified
Sep. 29, 2012
Dec. 31, 2011
Preferred stock, non-voting, authorized shares
25.0 
25.0 
Preferred stock, non-voting, issued shares
Class B common stock held in treasury
7.5 
7.5 
Class A common stock, voting
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, authorized shares
500.0 
500.0 
Common stock, issued shares
2.6 
2.6 
Common stock, outstanding shares
2.6 
2.6 
Class B common stock, non-voting
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, authorized shares
500.0 
500.0 
Common stock, issued shares
163.9 
162.7 
Class A exchangeable shares
 
 
Exchangeable shares, issued shares
2.9 
2.9 
Exchangeable shares, outstanding shares
2.9 
2.9 
Class B exchangeable shares
 
 
Exchangeable shares, issued shares
19.3 
19.3 
Exchangeable shares, outstanding shares
19.3 
19.3 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 29, 2012
Sep. 24, 2011
Cash flows from operating activities:
 
 
Net income (loss) including noncontrolling interests
$ 379.5 
$ 503.5 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
192.0 
161.3 
Amortization of debt issuance costs and discounts
34.5 
16.9 
Share-based compensation
15.1 
19.4 
Loss on sale or impairment of properties and intangibles
51.0 
13.8 
Deferred income taxes
15.5 
25.5 
Equity income in MillerCoors
(436.5)
(372.4)
Distributions from MillerCoors
436.5 
372.4 
Equity in net income of other unconsolidated affiliates
(12.0)
(18.7)
Distributions from other unconsolidated affiliates
10.4 
23.1 
Excess tax benefits from share-based compensation
(4.2)
(1.1)
Unrealized (gain) loss on foreign currency fluctuations and derivative instruments
(11.4)
9.2 
Change in current assets and liabilities and other, net of affect of Acquisition
171.2 
(148.0)
(Gain) loss from discontinued operations
(1.6)
(1.5)
Net cash provided by operating activities
840.0 
603.4 
Cash flows from investing activities:
 
 
Additions to properties
(143.4)
(126.3)
Proceeds from sales of properties and intangible assets
3.0 
1.5 
Acquisition of businesses, net of cash acquired
(2,257.4)
(41.3)
Change in restricted cash balances
2.7 
Payment on discontinued operations
(6.8)
Investment in MillerCoors
(826.1)
(657.3)
Return of capital from MillerCoors
723.3 
627.2 
Proceeds from settlements of derivative instruments
15.4 
Payments on settlement of derivative instruments
(110.6)
Investment in and advances to an unconsolidated affiliate
(3.4)
(99.4)
Trade loan repayments from customers
14.3 
14.2 
Trade loans advanced to customers
(7.4)
(7.6)
Net cash used in investing activities
(2,614.5)
(270.9)
Cash flows from financing activities:
 
 
Exercise of stock options under equity compensation plans
27.4 
8.5 
Excess tax benefits from share-based compensation
4.2 
1.1 
Payments for purchase of treasury stock
(271.1)
Dividends paid
(174.0)
(170.1)
Dividends paid to noncontrolling interests holders
(5.0)
(2.3)
Debt issuance costs
(40.3)
(2.2)
Proceeds from issuances of long-term debt
2,195.4 
Payments on long-term debt and capital lease obligations
(226.7)
(0.2)
Payments on debt assumed in Acquisition
(424.3)
Proceeds from short-term borrowings
14.0 
6.8 
Payments on short-term borrowings
(14.0)
(18.3)
Payments on settlement of derivative instruments
(4.0)
(99.2)
Net (payments) proceeds from revolving credit facilities
9.6 
1.5 
Change in overdraft balances and other
(105.0)
(10.8)
Net cash provided by (used in) financing activities
1,257.3 
(556.3)
Cash and cash equivalents:
 
 
Net increase (decrease) in cash and cash equivalents
(517.2)
(223.8)
Effect of foreign exchange rate changes on cash and cash equivalents
24.0 
(6.6)
Balance at beginning of year
1,078.9 
1,217.6 
Balance at end of period
$ 585.7 
$ 987.2 
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
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.à 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 as further described in Note 1 of the Notes to the Audited Consolidated Financial Statements ("Notes") included in our Annual Report on Form 10-K for the year ended December 31, 2011 ("Annual Report") and as amended and filed with the Securities and Exchange Commission ("SEC") on Form 8-K on April 26, 2012. We deconsolidated our joint venture in China, Molson Coors Si'hai ("MC Si'hai"), from our financial statements during the third quarter of 2012, due to a loss of our ability to control the joint venture, see Note 5, "Investments" for further discussion.
Unless otherwise indicated, information in this report is presented in U.S. dollars ("USD" or "$").
The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Such unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes included in our Annual Report. Our accounting policies did not change in the third quarter or first three quarters of 2012. The results of operations for the 13 and 39 weeks ended September 29, 2012, are not necessarily indicative of the results that may be achieved for the full fiscal year.
We follow a 52/53 week fiscal reporting calendar. Unless otherwise indicated, the third quarter and first three quarters of 2012 and 2011 refer to the 13 and 39 weeks ended September 29, 2012, and September 24, 2011, respectively. Fiscal year 2012 refers to the 52 weeks ending December 29, 2012, and fiscal year 2011 refers to the 53 weeks ended December 31, 2011.
MillerCoors and MCCE follow a monthly reporting calendar. The third quarter and first three quarters of 2012 and 2011 refer to the three and nine months ended September 30, 2012, and September 30, 2011, respectively, except for MCCE where the first three quarters of 2012 refer to the period from the Acquisition date of June 15, 2012 through September 30, 2012.
During the third quarter of 2012, there was immaterial activity on our allowance for credit losses on our MCBC-UK trade loan portfolios.
New Accounting Pronouncements
New Accounting Pronouncements
New Accounting Pronouncements
Adoption of New Accounting Pronouncements
Fair Value Measurement
In May 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to fair value measurement and disclosure requirements. The new guidance results in a consistent definition of fair value and convergence between U.S. GAAP and International Financial Reporting Standards ("IFRS") on both how to measure fair value and on what disclosures to provide about fair value measurements. The guidance was effective for our quarter ended March 31, 2012. The adoption of this guidance did not impact our financial position or results from operations.
Presentation of Other Comprehensive Income
In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income, which was later amended in December 2011. Upon adoption of the guidance, as amended, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective for our quarter ended March 31, 2012. The adoption of this guidance was limited to a change in the presentation of our results, which we have elected to include as a separate Condensed Consolidated Statement of Comprehensive Income.
Testing Goodwill for Impairment
In September 2011, the FASB issued authoritative guidance related to goodwill impairment testing. The new guidance permits an entity to first assess qualitative factors to whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for annual and interim goodwill impairment testing performed for our fiscal years beginning January 1, 2012. This guidance does not have an impact on our financial position or results from operations.
Testing Indefinite-lived Intangibles for Impairment
In July 2012, the FASB issued authoritative guidance related to the impairment testing of indefinite-lived intangibles. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible is less than its carrying amount. If it is concluded that this is the case, the annual impairment test is necessary. Otherwise, the annual impairment test is not required. This guidance is effective for annual and interim indefinite-lived intangibles impairment testing performed for our fiscal years beginning January 1, 2013, however, we have decided to early adopt and make it effective for our 2012 impairment review, which occurred during the third quarter of 2012. This guidance does not have an impact on our financial position or results from operations.
New Accounting Pronouncements Not Yet Adopted
Disclosure about Offsetting Assets and Liabilities
In December 2011, the FASB issued authoritative guidance enhancing the disclosure requirements related to offsetting asset and liability positions. The update creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to better facilitate comparison between financial statements prepared under U.S. GAAP and IFRS by requiring entities to provide financial statement users information about both gross and net exposures. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods thereafter. We do not anticipate that this guidance will have an impact on our financial position or results from operations.
Acquisition of Molson Coors Central Europe
Acquisition of Molson Coors Central Europe
Acquisition of StarBev
General
In accordance with our strategy to increase our portfolio of premium brands and deepen our reach into growth markets around the world, we completed the Acquisition of StarBev from StarBev L.P. (the "Seller") on June 15, 2012, for €2.7 billion (or $3.4 billion), including the assumption and payoff of pre-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 30 countries. The operating results of MCCE are reported in our new Central Europe operating segment and our MCI operating segment as further described in Note 4, "Segment Reporting." We incurred acquisition and integration costs of $5.1 million and $36.5 million in the third quarter and first three quarters of 2012, respectively. We also incurred financing-related expenses as further described in Note 8, "Other Income and Expense" and Note 13, "Debt."
Unaudited Pro Forma Financial Information
MCCE contributed Net sales of $328.2 million, of which $321.5 million is included in our Central Europe segment, and Income from continuing operations before income taxes of $90.4 million, of which $87.6 million is included in our Central Europe segment, from the Acquisition date of June 15, 2012, through September 29, 2012. The incremental portion not included in our Central Europe segment results is our Central Europe export and license business reflected in our MCI segment results. The following unaudited pro forma summary presents our Condensed Consolidated Statements of Operations as if MCCE had been acquired on December 26, 2010, the first day of our 2011 fiscal year. These amounts were calculated after conversion to U.S. GAAP, conforming to our accounting policies, and adjusting MCCE's results to reflect the depreciation and amortization that would have been charged assuming the preliminary fair value adjustments to Properties, net and Other intangibles, net resulting from the purchase had been applied from December 26, 2010, together with the consequential tax effects. These adjustments also reflect the removal of StarBev historical interest expense, the addition of interest expense to be prospectively incurred on the debt issued to finance the Acquisition and the removal of the previously mentioned acquisition-related costs of $31.4 million incurred prior to the third quarter. Additional significant adjustments recorded during the second quarter of 2012 include the removal of the following non-recurring, transaction-related costs included in the historical operating results: a $57.9 million Euro currency loss, a $39.2 million loss related to standard pre-issuance U.S. Treasury interest rate hedges ("Treasury Locks"), and bridge facility costs of $13.0 million, as further described in Note 8, "Other Income and Expense" and Note 13, "Debt", as well as expense of $8.6 million related to the fair value adjustment to acquisition date inventory. This unaudited pro forma financial information is not intended to reflect the performance which would have actually resulted had the Acquisition been effected on the dates indicated. Further, the unaudited pro forma results of operations are not necessarily indicative of the results of operations that may be obtained in the future.
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 24, 2011
 
September 29, 2012(1)
 
September 24, 2011
 
(In millions)
Net sales
$
1,269.2

 
$
3,226.8

 
$
3,338.6

Income from continuing operations before income taxes
$
284.7

 
$
590.7

 
$
680.0

Net income attributable to MCBC
$
253.2

 
$
497.8

 
$
589.8

Net income per common share attributable to MCBC:
 
 
 
 
 
         Basic
$
1.36

 
$
2.76

 
$
3.16

         Diluted
$
1.36

 
$
2.74

 
$
3.13

(1)
The thirty-nine weeks ended September 29, 2012, include actual results for the period from the Acquisition date of June 15, 2012.
Fair Value of the Purchase Price
The following table summarizes the purchase price, inclusive of pre-existing debt assumed and subsequently repaid, to acquire StarBev:
 
Fair Value
 
(In millions)
Cash consideration to Seller
$
1,816.0

Fair value of convertible note issued to Seller(1)
645.9

Senior debt facilities with third-party creditor(2)
585.0

Total consideration
$
3,046.9

Cash, net of bank overdraft acquired(3)
$
(42.3
)
Subordinated deferred payment obligation ("SDPO") with third-party creditors(4)
423.4

Total purchase price, inclusive of pre-existing debt assumed and subsequently repaid
$
3,428.0

(1)
We issued a €500 million Zero Coupon Senior Unsecured Convertible Note due 2013 to the Seller upon close of the Acquisition. See Note 13, "Debt" for further discussion.
(2)
According to our agreement with the Seller and in accordance with the terms of the senior debt facility agreement, upon the closing of the Acquisition, we immediately repaid pre-existing StarBev third-party debt including accrued interest.
(3)
Consists of $143.6 million of cash acquired and $101.3 million of bank overdrafts assumed as part of MCCE's cash pool arrangement and repaid during the third quarter of 2012.
(4)
We assumed the pre-existing StarBev $423.4 million SDPO payable to third-party creditors, which we subsequently repaid on June 29, 2012, in accordance with the terms of the SDPO agreement. The SDPO was held by private investors and accrued interest at 11%. The settlement of the SDPO was not required by our agreement with the Seller.
The following table represents the classifications of the cash flows used, which are included within our Condensed Consolidated Statements of Cash Flows:
 
(In millions)
Operating activities(1)
$
1.4

Investing activities(2)
2,257.4

Financing activities(1)
424.3

Total cash used
$
2,683.1

Non-cash(3)
$
645.9

(1)
Includes the SDPO discussed above, which was subsequently repaid on June 29, 2012, for $425.7 million including the $1.4 million of interest incurred subsequent to the close of the Acquisition noted as "Operating activities" in the table above.
(2)
Includes $1,816.0 million of cash consideration to the Seller for shares acquired and release of StarBev's pre-existing obligations to the Seller. Also, included is $585.0 million of pre-existing third-party debt immediately repaid in accordance with our agreement with the Seller and the terms of the senior debt facility agreement. This amount is presented net of cash acquired of $143.6 million.
(3)
Reflects the $645.9 million fair value of the convertible note issued to the Seller upon close of the Acquisition. See Note 13, "Debt" for further discussion.
Allocation of Consideration Transferred
The following table represents the preliminary allocation of the total consideration to MCCE's identifiable net assets, fair value of the noncontrolling interest in MCCE, and resulting residual goodwill as of June 15, 2012. These allocated amounts were updated in the third quarter of 2012 and remain subject to revision until our valuation and tax-related adjustments are finalized, which we expect to occur during the fourth quarter of 2012. The changes in the third quarter of 2012 resulted in an increase to Goodwill of approximately $69 million primarily driven by the decrease in the valuation of Other intangibles, net.
 
Fair Value
 
(In millions)
Cash and cash equivalents
$
143.6

Current assets(1)
260.9

Properties, net
582.0

Other intangibles, net(2)
2,430.8

Other assets
41.0

Total assets acquired
$
3,458.3

Current liabilities(3)
847.6

Non-current liabilities(4)
423.3

Total liabilities assumed
$
1,270.9

Total identifiable net assets
$
2,187.4

Noncontrolling interest measured at fair value
40.6

Goodwill(5)
900.1

Total consideration
$
3,046.9

(1)
Includes trade receivables of $152.2 million and inventory of $57.3 million.
(2)
See Note 12, "Goodwill and Intangible Assets" for further discussion.
(3)
Includes the $423.4 million SDPO assumed, which was subsequently repaid for $425.7 million on June 29, 2012.
(4)
Includes $403.4 million of deferred tax liabilities.
(5)
The goodwill resulting from the Acquisition is primarily attributable to MCCE's licensed brand brewing, distribution and import business, anticipated synergies and the assembled workforce. We have preliminarily assigned the majority of the goodwill to our Central Europe reporting unit with a portion allocated to the U.K. and Canada reporting units resulting from synergies. The goodwill is not expected to be deductible for tax purposes. See Note 12, "Goodwill and Intangible Assets" for further discussion.
Segment Reporting
Segment Reporting
Segment Reporting
Our reporting segments are based on the key geographic regions in which we operate and consist of Canada, the United States ("U.S."), Central Europe, the United Kingdom ("U.K.") and Molson Coors International ("MCI"). Corporate is not a segment and includes interest and certain other general and administrative costs that are not allocated to any of the operating segments. Beginning July 1, 2012, our Central Europe export and license business, added as part of the Acquisition, which includes licensing arrangements in Russia and Ukraine and the export of Central European brands, is being reported in our MCI segment. 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, previously reported segment results have not been recast.
The following table sets forth net sales by segment:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Canada
$
580.1

 
$
598.9

 
$
1,565.3

 
$
1,557.4

Central Europe(1)
264.2

 

 
321.5

 

U.K. 
313.5

 
327.2

 
903.1

 
943.6

MCI
43.0

 
31.1

 
108.2

 
80.9

Corporate
0.2

 
0.4

 
0.9

 
1.0

Eliminations(2)
(5.5
)
 
(3.2
)
 
(12.7
)
 
(4.5
)
         Consolidated
$
1,195.5

 
$
954.4

 
$
2,886.3

 
$
2,578.4

(1)
Net sales for the thirty-nine weeks ended September 29, 2012, for Central Europe represents activity from the Acquisition date of June 15, 2012.
(2)
Represents inter-segment sales from the U.K. segment to the MCI segment.
Across each of our segments, no single customer accounted for more than 10% of our sales. Net sales represent sales to third-party customers.
The following table sets forth income (loss) from continuing operations before income taxes by segment:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Canada
$
147.0

 
$
162.0

 
$
330.8

 
$
346.0

U.S. 
132.0

 
99.4

 
436.5

 
372.4

Central Europe(1)
75.2

 

 
87.6

 

U.K. 
7.7

 
25.3

 
25.3

 
64.4

MCI(2)
(37.4
)
 
(7.4
)
 
(70.3
)
 
(25.5
)
Corporate(3)
(81.3
)
 
(53.9
)
 
(346.3
)
 
(164.9
)
         Consolidated
$
243.2

 
$
225.4

 
$
463.6

 
$
592.4

(1)
Income from continuing operations before income taxes for the thirty-nine weeks ended September 29, 2012, for Central Europe represents activity from the Acquisition date of June 15, 2012.
(2)
Reflects goodwill and other intangible asset impairments recorded in the second quarter of 2012 and asset impairments recorded in the third quarter of 2012 in China. See Note 5, "Investments" and Note 12, "Goodwill and Intangible Assets" for further discussion.
(3)
Reflects acquisition-related costs as described further in Note 3, "Acquisition of StarBev."
The following table sets forth total assets by segment:
 
As of
 
September 29, 2012
 
December 31, 2011
 
(In millions)
Canada
$
6,604.9

 
$
6,541.6

U.S. 
2,626.6

 
2,487.9

Central Europe
4,289.9

 

U.K. 
2,401.6

 
2,293.4

MCI
87.5

 
151.7

Corporate
456.0

 
948.9

Discontinued operations

 
0.3

         Consolidated
$
16,466.5

 
$
12,423.8

Investments
Investments
Investments
Our investments include both equity method and consolidated investments. Those entities identified as variable interest entities ("VIEs") have been evaluated to determine whether we are the primary beneficiary. The investments included under "Consolidated VIEs" below are those for which we have concluded that we are the primary beneficiary and accordingly, we consolidate these entities. We have not provided any financial support to any of our VIEs during the quarter that we were not previously contractually obligated to provide. 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.
Equity Investments
Investment in MillerCoors
Summarized financial information for MillerCoors is as follows:
Condensed Balance Sheets
 
As of
 
September 30, 2012
 
December 31, 2011
 
(In millions)
Current assets
$
1,023.6

 
$
810.9

Non-current assets
8,812.4

 
8,861.7

Total assets
$
9,836.0

 
$
9,672.6

Current liabilities
$
900.5

 
$
922.7

Non-current liabilities
1,338.8

 
1,471.3

Total liabilities
2,239.3

 
2,394.0

Noncontrolling interests
31.8

 
36.7

Owners' equity
7,564.9

 
7,241.9

Total liabilities and equity
$
9,836.0

 
$
9,672.6

Results of Operations
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
(In millions)
Net sales
$
1,993.5

 
$
1,964.9

 
$
5,977.3

 
$
5,796.3

Cost of goods sold
(1,201.1
)
 
(1,213.3
)
 
(3,582.9
)
 
(3,545.1
)
Gross profit
$
792.4

 
$
751.6

 
$
2,394.4

 
$
2,251.2

Operating income(1)
$
310.5

 
$
179.2

 
$
1,033.9

 
$
824.3

Net income attributable to MillerCoors(1)
$
306.9

 
$
176.4

 
$
1,020.5

 
$
809.8

(1)
Results for the three months and nine months ended September 30, 2012, include special charges of $18.7 million and $16.4 million, respectively, primarily due to the write-down of assets related to discontinuing the production of the Home Draft package in the U.S. Results for the three months and nine months ended September 30, 2011, include 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.
The following represents MCBC's proportional share in net income attributable to MillerCoors reported under the equity method:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions, except percentages)
Net income attributable to MillerCoors
$
306.9

 
$
176.4

 
$
1,020.5

 
$
809.8

MCBC economic interest
42
%
 
42
%
 
42
%
 
42
%
MCBC proportionate share of MillerCoors net income
128.9

 
74.1

 
428.6

 
340.1

Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1)
1.2

 
27.7

 
3.1

 
32.6

Share-based compensation adjustment(2)
1.9

 
(2.4
)
 
4.8

 
(0.3
)
Equity income in MillerCoors
$
132.0

 
$
99.4

 
$
436.5

 
$
372.4

(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")) by approximately $585 million as of September 29, 2012. This difference, with the exception of goodwill and land, is amortized as additional equity income over the remaining useful lives of the contributed long-lived amortizing assets. The current basis difference combined with the $35.0 million recorded in 2008 and 2009 related to differences resulting from accounting policy elections must be considered to reconcile MillerCoors equity to our investment in MillerCoors.
(2)
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 plc 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 plc equity awards, which represent the amounts recorded in 2012.
The following table summarizes our transactions with MillerCoors:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Beer sales to MillerCoors
$
4.6

 
$
6.2

 
$
14.8

 
$
23.7

Beer purchases from MillerCoors
$
3.9

 
$
2.0

 
$
9.3

 
$
6.7

Service agreement costs and other charges to MillerCoors
$
1.0

 
$
1.7

 
$
3.0

 
$
5.1

Service agreement costs and other charges from MillerCoors
$
0.4

 
$
0.3

 
$
1.0

 
$
0.9


As of September 29, 2012, we had $1.9 million of net payables due to MillerCoors, and as of December 31, 2011, we had $2.0 million of net receivables due from MillerCoors.
Consolidated VIEs
The following summarizes the assets of our consolidated VIEs, including noncontrolling interests. None of our consolidated VIEs held debt as of September 29, 2012, or December 31, 2011.
 
As of
 
September 29, 2012
 
December 31, 2011
 
Total assets
 
(In millions)
Grolsch
$
13.4

 
$
20.4

Cobra U.K.
$
30.1

 
$
31.6

The following summarizes the results of operations of our consolidated VIEs (including noncontrolling interests).
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
(In millions)
Grolsch(1)
$
6.5

 
$
0.9

 
$
6.8

 
$
1.0

 
$
18.1

 
$
2.6

 
$
19.7

 
$
2.8

Cobra U.K.
$
11.7

 
$
1.5

 
$
10.1

 
$
1.7

 
$
30.7

 
$
3.6

 
$
28.7

 
$
4.8

(1)
Substantially all such sales for Grolsch are made to us and as such, are eliminated upon consolidation.
MC Si'hai Deconsolidation and Impairment
During the third quarter of 2012, there were a number of events that caused us to re-assess the consolidation of our MC Si'hai joint venture in China. Specifically, in the third quarter, (i) we terminated an agreement previously signed in the second quarter of 2012, which was intended to allow us to acquire the noncontrolling interest in the joint venture, and (ii) we decided to also initiate the termination of the joint venture agreement and a proposed liquidation of the joint venture. We terminated the agreement to acquire the joint venture's noncontrolling interest as a result of our joint venture partner's multiple breaches of the agreement, as well as our joint venture partner's failure and inability to satisfy numerous closing conditions. We subsequently began pursuing a path to terminate and liquidate the joint venture pursuant to the terms of the joint venture agreement's dispute resolution process, which requires arbitration. It is expected that the arbitration and liquidation process likely will be protracted and that there may be significant further delays in enforcing any order from the arbitrator with the local authorities.
Due to our termination of the agreement to acquire the joint venture partner's noncontrolling interest and the joint venture agreement and the joint venture partner's actions during the third quarter of 2012, we are not able 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 loss of control and subsequent 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. As a result, we recorded an impairment loss of $27.6 million as a Special item in the third quarter of 2012. We do not anticipate any future material impacts to our consolidated financial position, results of operations or cash flows. See Note 12, "Goodwill and Intangible Assets" for further discussion of the MC Si'hai joint venture.
Share-Based Payments
Share-Based Payments
Share-Based Payments
During the first three quarters of 2012 and 2011, we recognized share-based compensation expense related to the following Class B common stock awards to certain directors, officers and other eligible employees, pursuant to the Molson Coors Brewing Company Incentive Compensation Plan ("Incentive Compensation Plan"): restricted stock units ("RSU"), deferred stock units ("DSU"), performance units ("PU"), stock options and stock-only stock appreciation rights ("SOSAR").
The following table summarizes share-based compensation expense:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Pre-tax compensation expense
$
5.2

 
$
5.0

 
$
15.1

 
$
19.3

Tax benefit
(1.4
)
 
(1.4
)
 
(4.3
)
 
(5.3
)
After-tax compensation expense
$
3.8

 
$
3.6

 
$
10.8

 
$
14.0

During the first three quarters of 2012, we granted 0.3 million stock options, 0.4 million RSUs and 0.7 million PUs, all of which were outstanding, other than an insignificant amount of cancellations, as of September 29, 2012.
The mark-to-market share-based compensation expense before tax, related to our share-based awards granted to former CBC employees now employed by MillerCoors, was a benefit of $0.1 million during the first three quarters of 2011. We did not record an adjustment in the third quarter of 2011, the third quarter of 2012, or the first three quarters of 2012 as these awards were fully vested as of the end of the second quarter of 2011. No further adjustments will be recorded related to these awards, which are included in the table above.
As of September 29, 2012, there was $30.1 million of total unrecognized pre-tax compensation expense related to non-vested shares from share-based compensation arrangements granted under the Incentive Compensation Plan. This compensation expense is expected to be recognized over a weighted-average period of approximately 1.4 years.
The following table represents the summary of stock options and SOSARs outstanding as of September 29, 2012, and the activity during the first three quarters of 2012:
 
Outstanding
options
 
Weighted-average
exercise price per
share
 
Weighted-average
remaining
contractual life
(years)
 
Aggregate
intrinsic value
 
(In millions, except per share amounts and years)
Outstanding as of December 31, 2011
7.1
 
$38.69
 
4.31
 
$
43.1

Granted
0.3
 
$42.57
 
 
 
 
Exercised
(0.9)
 
$29.74
 
 
 
 
Forfeited
(0.1)
 
$47.18
 
 
 
 
Outstanding as of September 29, 2012
6.4
 
$40.09
 
4.21
 
$
37.9

Exercisable at September 29, 2012
5.4
 
$39.51
 
3.50
 
$
36.4

The total intrinsic value of options exercised during the first three quarters of 2012 and 2011 was $13.0 million and $2.7 million, respectively. During the first three quarters of 2012 and 2011, cash received from stock option exercises was $27.4 million and $8.5 million, respectively. The total tax benefit to be realized for the tax deductions from these option exercises and other awards was $4.2 million and $1.1 million during the first three quarters of 2012 and 2011, respectively.
The following table represents non-vested RSUs, DSUs and PUs as of September 29, 2012, and the activity during the first three quarters of 2012:
 
RSUs and DSUs
 
PUs
 
Units
 
Weighted-average
grant date fair value
per unit
 
Units
 
Weighted-average
grant date fair value
per unit
 
(In millions, except per unit amounts)
Non-vested as of December 31, 2011
0.6

 
$43.35
 
2.0

 
$11.67
Granted
0.4

 
$42.02
 
0.7

 
$14.35
Vested
(0.2
)
 
$42.50
 
(0.7
)
 
$10.92
Forfeited

 
$43.38
 
(0.1
)
 
$10.97
Non-vested as of September 29, 2012
0.8

 
$43.07
 
1.9

 
$10.98
The fair value of each option granted in the first three quarters of 2012 and 2011 was determined on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
Risk-free interest rate
1.50%
 
2.60%
Dividend yield
2.99%
 
2.56%
Volatility range
25.80%-27.56%
 
25.26%-29.35%
Weighted-average volatility
25.86%
 
26.25%
Expected term (years)
4.0-7.7
 
4.0-7.7
Weighted-average fair market value
$8.09
 
$9.64
The risk-free interest rates utilized for periods throughout the contractual life of the options are based on a zero-coupon U.S. Treasury security yield at the time of grant. Expected volatility is based on a combination of historical and implied volatility of our stock. The expected term of options is estimated based upon observations of historical employee option exercise patterns and trends. The range on the expected term results from separate groups of employees who exhibit different historical exercise behavior.
As of September 29, 2012, there were 8.0 million shares of our Class B common stock available for the issuance of stock options, SOSARs, RSUs, DSUs, PUs and performance share units under the Incentive Compensation Plan. This reflects the 5.0 million additional shares approved by our shareholders during the second quarter of 2012.
Special items
Special Items
Special Items
We have incurred charges or recognized gains that we believe are not indicative of our normal, core operations. As such, we have separately classified these amounts as special operating items. The table below summarizes special items recorded by segment:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Employee related charges
 
 
 
 
 
 
 
Restructuring(1)
 
 
 
 
 
 
 
Canada
$
2.5

 
$

 
$
4.1

 
$
0.6

Central Europe
0.1

 

 
0.1

 

U.K.
2.4

 
(0.5
)
 
8.7

 
2.2

MCI
1.2

 

 
1.2

 

Corporate

 

 
1.1

 

Special termination benefits
 
 
 
 
 
 
 
Canada(2)
0.3

 
0.7

 
2.2

 
4.7

Impairments or asset abandonment charges
 
 
 
 
 
 
 
U.K. - Asset abandonment(3)

 

 
7.2

 

MCI - China impairments and related costs(4)
28.5

 

 
38.9

 

Unusual or infrequent items
 
 
 
 
 
 
 
Canada - Flood insurance loss (reimbursement)(5)
0.9

 
(0.4
)
 
(1.4
)
 
(0.3
)
Canada - Brewers' Retail Inc. ("BRI") loan guarantee adjustment(6)

 

 

 
(2.0
)
Canada - Fixed asset adjustment(7)

 

 

 
7.6

U.K. - Release of non-income-related tax reserve(8)

 

 
(3.5
)
 
(2.5
)
U.K. - Costs associated with strategic initiatives

 
0.1

 

 
0.1

MCI - Costs associated with outsourcing and other strategic initiatives

 
0.2

 

 
0.7

Total Special items, net
$
35.9

 
$
0.1

 
$
58.6

 
$
11.1

(1)
During 2012, we initiated restructuring programs in each of our segments focused on labor savings across all functions. As a result, we have reduced headcount by 189 employees during the first three quarters of 2012 and we expect further headcount reduction during the fourth quarter, although we are unable to estimate future costs at this time.
(2)
During the third quarter and first three quarters of 2012 and 2011, we recognized charges related to special termination benefits as eligible employees elected early retirement offered as a result of the ratification of Collective Bargaining Agreements with MCC's brewery groups in 2011 and 2012.
(3)
During the second quarter of 2012, we recognized an asset abandonment charge related to the discontinuation of the Home Draft packaging in the U.K. This packaging was not meeting expectations driven by a lack of demand in the U.K. market and as a result, we recognized a loss related to the write-off of the Home Draft packaging line, tooling equipment and packaging materials inventory.
(4)
In the second quarter of 2012, we recognized impairment charges related to goodwill and definite-lived intangible assets in our MC Si'hai joint venture in China. See related detail in Note 12 "Goodwill and Intangible Assets." In the third quarter of 2012, we deconsolidated our MC Si'hai joint venture in China and recognized an impairment loss of $27.6 million upon deconsolidation and $0.9 million of related costs. See related detail in Note 5, "Investments."
(5)
In the third quarter of 2012, we incurred expenses in excess of insurance proceeds related to flood damage at our Toronto offices. In the first three quarters of 2012 and third quarter and first three quarters of 2011, we received insurance proceeds in excess of expenses incurred related to these damages.
(6)
During the first three quarters of 2011, we recognized a gain resulting from a reduction of our guarantee of BRI debt obligations.
(7)
During the first three quarters of 2011, we recognized a loss related to the correction of an immaterial error in prior periods to reduce Properties in the Canada segment, resulting from the performance of a fixed asset count. The impact of the error and the related correction in 2011 is not material to any prior annual or interim financial statements and is not material to the fiscal year results for 2011.
(8)
During 2009, we established a non-income-related tax reserve of $10.4 million that was recorded as a Special item. Our estimates indicated a range of possible loss relative to this reserve of zero to $22.3 million, inclusive of potential penalties and interest. The amounts recorded in 2012 and 2011 represent a release of a portion of this reserve as a result of a change in estimate.
The table below summarizes the activity in the restructuring accruals:
 
Canada
 
Central Europe
 
U.K.
 
MCI
 
Corporate
 
Total
 
(In millions)
Total at December 31, 2011
$
0.1

 
$

 
$
1.8

 
$

 
$

 
$
1.9

Charges incurred
4.1

 
0.1

 
8.7

 
1.2

 
1.1

 
15.2

Payments made
(1.2
)
 

 
(4.9
)
 

 
(0.3
)
 
(6.4
)
Foreign currency and other adjustments
(0.1
)
 

 
(0.2
)
 

 

 
(0.3
)
Total at September 29, 2012
$
2.9

 
$
0.1

 
$
5.4

 
$
1.2

 
$
0.8

 
$
10.4



Other Income and Expense
Other Income and Expense
Other Income and Expense
The table below summarizes other income and expense:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Bridge facility fees(1)
$

 
$

 
$
(13.0
)
 
$

Euro currency purchase loss(2)

 

 
(57.9
)
 

Gain (loss) from Foster's total return swap and related financial instruments(3)

 

 

 
0.8

Gain (loss) from other foreign exchange and derivative activity(4)
(6.4
)
 
(2.7
)
 
(8.7
)
 
(6.7
)
Environmental reserve
(0.1
)
 

 
(0.1
)
 
(0.1
)
Other, net
0.1

 
0.4

 
1.4

 
1.2

Other income (expense), net
$
(6.4
)
 
$
(2.3
)
 
$
(78.3
)
 
$
(4.8
)
(1)
See Note 13, "Debt" for further discussion.
(2)
In connection with the Acquisition, we used the proceeds from our issuance of the $1.9 billion senior notes to purchase Euros in the second quarter of 2012. 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 on our Euro cash holdings.
(3)
During the first quarter of 2011, we settled our remaining Foster's Group Limited's ("Fosters") total return swap and related financial instruments.
(4)
Included in this amount is $6.4 million and $5.8 million of losses for the third quarter of 2012 and first three quarters of 2012, respectively, related to foreign currency movements on foreign-denominated financing instruments entered into in conjunction with the closing of the Acquisition. See Note 13, "Debt" for further discussion of financing activities related to the Acquisition.
Discontinued Operations
Discontinued Operations
Discontinued Operations
In 2006, we sold our entire equity interest in our Brazilian unit, Cervejarias Kaiser Brasil S.A. ("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 arising prior to FEMSA's purchase of Kaiser. In the third quarters of 2012 and 2011, we recognized gains of $1.2 million and $3.2 million, respectively, from discontinued operations associated with foreign exchange gains and losses related to indemnities we provided to FEMSA with regard to contingent tax and other liabilities. During the first three quarters of 2012 and 2011, we recognized gains of $3.6 million and $2.0 million, respectively. See further discussion in Note 16, "Commitments and Contingencies."
During the third quarter of 2012, we finalized the settlement related to a distributorship litigation for $6.8 million, which included the $6.3 million accrued at the end of the second quarter of 2012, as well as an additional loss of $0.5 million related to fees incurred on the settlement. We recognized losses on settlement of the litigation of $0.5 million and $2.0 million during the third quarter and first three quarters of 2012, respectively. During the third quarter and first three quarters of 2011, we recognized a loss of $0.5 million related to an adjustment in the legal reserve. As of September 29, 2012, there are no accruals for legal matters related to discontinued operations. As of December 31, 2011, current liabilities of discontinued operations included current legal reserves of $4.8 million. See further discussion in Note 16, "Commitments and Contingencies."
Income Tax
Income Tax
Income Tax
Our effective tax rates for the third quarters of 2012 and 2011 were approximately 17% and 14%, respectively. For the first three quarters of 2012 and 2011, our effective tax rates were approximately 18% and 15%, respectively. Our effective tax rate estimate for the full year is based on the preliminary purchase accounting for the Acquisition, which was updated in the third quarter of 2012, and may be adjusted as purchase accounting is finalized.
Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled. There are proposed or pending tax law changes in various jurisdictions that, if enacted, may have an impact on our effective tax rate.
As of December 31, 2011, we had Unrecognized tax benefits including interest, penalties and offsetting positions of $77.4 million, of which $1.0 million was current and included in Accrued expenses and other liabilities and $76.4 million was non-current. As of September 29, 2012, Unrecognized tax benefits increased by $21.4 million from December 31, 2011. This addition is net of varying items including increases and decreases due to fluctuations in foreign exchange rates, additional uncertain tax benefits, including those from the Acquisition, interest accrued for the current year, certain tax positions closing or being effectively settled, and payments made to tax authorities with regard to uncertain tax benefits during the first three quarters of 2012. This results in Unrecognized tax benefits including interest, penalties and offsetting positions of $98.8 million as of September 29, 2012, of which $3.0 million is current and included in Accrued expenses and other liabilities and $95.8 million is non-current.
During the remainder of 2012, we expect to recognize approximately $9.0 million of non-cash income tax benefit due primarily to the favorable resolution of unrecognized tax positions that we effectively settled early in the fourth quarter of 2012.
We file income tax returns in most of the federal, state, and provincial jurisdictions in the U.S., Canada, the U.K., and various countries in Central Europe. Tax years through 2006 are closed in the U.S., while exam years 2007 and 2008 have been effectively settled and only remain open pending finalization of an advanced pricing agreement. Tax years through fiscal year ended 2006 are closed or have been effectively settled through examination in Canada. Tax year 2007 is currently under audit in Canada. The audit is closed for all issues except one relating to an intercompany transaction. Tax years through 2008 are closed or have been effectively settled through examination in the U.K. Tax years through fiscal year 2004 are closed for most countries in Central European jurisdictions with statutes of limitations varying from 3-7 years.
Earnings per Share ("EPS")
Earnings per Share ("EPS")
Earnings Per Share
Basic net income per share was computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the additional dilutive effect of our potentially dilutive securities, which include stock options, SOSARs, RSUs, PUs, and DSUs. The dilutive effects of our potentially dilutive securities are calculated using the treasury stock method. Diluted income per share could also be impacted by our convertible debt and related warrants outstanding if they were in the money. The following summarizes the effect of dilutive securities on diluted EPS:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Amounts attributable to MCBC
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
197.7

 
$
194.7

 
$
381.4

 
$
501.6

Income (loss) from discontinued operations, net of tax
0.7

 
2.7

 
1.6

 
1.5

Net income (loss) attributable to MCBC
$
198.4

 
$
197.4

 
$
383.0

 
$
503.1

Weighted average shares for basic EPS
181.0

 
185.0

 
180.7

 
186.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Options and SOSARs
0.6

 
0.8

 
0.5

 
0.9

RSUs, PUs and DSUs
0.4

 
0.4

 
0.5

 
0.6

Weighted average shares for diluted EPS
182.0

 
186.2

 
181.7

 
187.8

Basic net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations attributable to MCBC
$
1.09

 
$
1.05

 
$
2.11

 
$
2.69

Discontinued operations attributable to MCBC

 
0.01

 
0.01

 
0.01

Net income attributable to MCBC
$
1.09

 
$
1.06

 
$
2.12

 
$
2.70

Diluted net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations attributable to MCBC
$
1.09

 
$
1.05

 
$
2.10

 
$
2.67

Discontinued operations attributable to MCBC

 
0.01

 
0.01

 
0.01

Net income attributable to MCBC
$
1.09

 
$
1.06

 
$
2.11

 
$
2.68

Dividends declared and paid per share
$
0.32

 
$
0.32

 
$
0.96

 
$
0.92


The following anti-dilutive securities were excluded from the computation of the effect of dilutive securities on diluted earnings per share:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 29, 2012
 
September 24, 2011
 
September 29, 2012
 
September 24, 2011
 
(In millions)
Stock options, SOSARs and RSUs(1)
0.9

 
1.0

 
1.5

 
0.6

Shares of Class B common stock issuable upon assumed conversion of the 2.5% Convertible Senior Notes(2)
11.0

 
10.8

 
10.9

 
10.7

Warrants to issue shares of Class B common stock(2)
11.0

 
10.8

 
10.9

 
10.7

Shares of Class B common stock issuable upon assumed conversion of the €500 million Convertible Note(3)
1.4

 

 
0.6

 

 
24.3

 
22.6

 
23.9

 
22.0

(1)
Exercise prices exceed the average market price of the common shares or are anti-dilutive due to the impact of the unrecognized compensation cost on the calculation of assumed proceeds in the application of the treasury stock method.
(2)
In June 2007, we issued $575 million of senior convertible notes due July 2013. The impact of a net share settlement of the conversion amount at maturity will begin to dilute earnings per share if and when our stock price reaches $52.38. The impact of stock that could be issued to settle share obligations we could have under the warrants we issued simultaneously with the senior convertible notes issuance will begin to dilute earnings per share when our stock price reaches $67.05. The potential receipt of MCBC stock from counterparties under our purchased call options when and if our stock price is between $52.38 and $67.05 would be anti-dilutive and excluded from any calculations of earnings per share.
(3)
Upon closing of the Acquisition in June 2012, we issued a €500 million Zero Coupon Senior Unsecured Convertible Note due 2013 to the Seller. The impact of a net share settlement of the conversion amount at maturity will begin to dilute earnings per share if and when our stock price reaches $49.87 based on foreign exchange rates at September 29, 2012. See further discussion in Note 13, "Debt."
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets
The following summarizes the change in goodwill for the first three quarters of 2012 (in millions):
 
Canada
 
Central Europe
 
U.K.
 
MCI
 
Consolidated
 
(In millions)
Balance at December 31, 2011
$
689.5

 
$

 
$
746.1

 
$
17.7

 
$
1,453.3

Business acquisition(1)
60.5

 
751.3

 
88.3

 

 
900.1

Impairment related to China reporting unit

 

 

 
(9.5
)
 
(9.5
)
Foreign currency translation
26.1

 
15.8

 
29.6

 
(0.2
)
 
71.3

Purchase price adjustment

 

 

 
0.4

 
0.4

Balance at September 29, 2012
$
776.1

 
$
767.1

 
$
864.0

 
$
8.4

 
$
2,415.6

(1)
On June 15, 2012, we completed the Acquisition. See Note 3, "Acquisition of StarBev" for further discussion. We have preliminarily assigned the majority of the goodwill to our Central Europe reporting unit with a portion allocated to the U.K. and Canada reporting units resulting from synergies. This allocation is subject to change as we finalize purchase accounting, which we expect to occur during the fourth quarter of 2012.
The following table presents details of our intangible assets, other than goodwill, as of September 29, 2012:
 
Useful life
 
Gross
 
Accumulated
amortization
 
Net
 
(Years)
 
(In millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Brands(1)
 3 - 40
 
$
475.6

 
$
(202.2
)
 
$
273.4

Distribution rights
 2 - 23
 
355.1

 
(254.3
)
 
100.8

Patents and technology and distribution channels
 3 - 10
 
35.3

 
(30.9
)
 
4.4

Favorable contracts, land use rights and other(1)
 2 - 42
 
13.2

 
(3.3
)
 
9.9

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Brands(1)
 Indefinite
 
5,794.5

 

 
5,794.5

Distribution networks
 Indefinite
 
1,028.4

 

 
1,028.4

Other
 Indefinite
 
15.5

 

 
15.5

Total
 
 
$
7,717.6

 
$
(490.7
)
 
$
7,226.9

(1)
Includes the preliminary fair values of $143.4 million for brand intangibles with a 30 year useful life, $2,275.4 million, as adjusted in the third quarter of 2012, for brand intangibles with an indefinite-life and a preliminary fair value of a favorable supply contract and other intangibles of $12.0 million with a 2 year useful life as a result of the Acquisition. See Note 3, "Acquisition of StarBev" for total allocation of consideration.
The following table presents details of our intangible assets, other than goodwill, as of December 31, 2011:
 
Useful life
 
Gross
 
Accumulated
amortization
 
Net
 
(Years)
 
(In millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Brands
3 - 40
 
$
316.9

 
$
(179.0
)
 
$
137.9

Distribution rights
2 - 23
 
342.0

 
(234.0
)
 
108.0

Patents and technology and distribution channels
3 - 10
 
34.9

 
(28.9
)
 
6.0

Land use rights and other
2 - 42
 
6.5

 
(0.8
)
 
5.7

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Brands
Indefinite
 
3,322.4

 

 
3,322.4

Distribution networks
Indefinite
 
990.5

 

 
990.5

Other
Indefinite
 
15.5

 

 
15.5

Total
 
 
$
5,028.7

 
$
(442.7
)
 
$
4,586.0

The changes in the gross carrying amounts of intangibles from December 31, 2011, to September 29, 2012, are primarily due to the Acquisition. See Note 3, "Acquisition of StarBev" for further discussion. Changes are also driven by the impact of foreign exchange rates, as a significant amount of intangibles are denominated in foreign currencies.
Based on foreign exchange rates as of September 29, 2012, the following is our estimated amortization expense related to intangible assets for the next five years:
 
Amount
 
(In millions)
2012 - remaining
$
11.9

2013
$
47.8

2014
$
39.9

2015
$
37.2

2016
$
37.2


Amortization expense of intangible assets was $11.8 million and $9.7 million for the third quarters of 2012 and 2011, respectively, and $30.4 million and $30.0 million for the first three quarters of 2012 and 2011, respectively.
We are required to perform goodwill and indefinite-lived intangible asset impairment tests on at least an annual basis and more frequently in certain circumstances. We performed the required annual impairment testing as of July 1, 2012, and determined that there were no impairments of goodwill or other indefinite-lived intangible assets. We did not include the China reporting unit in our annual goodwill impairment testing as of July 1, 2012, as the entire goodwill balance was impaired and written off in the second quarter of 2012.
Through our annual impairment testing of goodwill performed in the third quarter of 2012, it was determined that the fair value of our U.K. and Canada reporting units were at risk of failing step one of the goodwill impairment test. The fair value of the U.K. reporting unit was estimated at approximately 7% in excess of its carrying value (of which $864.0 million is goodwill as of September 29, 2012) and the fair value of the Canada reporting unit was estimated at approximately 15% in excess of its carrying value (of which $776.1 million is goodwill as of September 29, 2012). The reporting units 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. For testing purposes, management's best estimates of the expected future results are the primary driver in determining the fair value. Current projections reflect challenging environments that have been adversely impacted by a weak economy across all industries, partially offset by anticipated cost savings and specific brand-building and innovation activities.
Through our annual impairment testing of indefinite-lived intangibles performed in the third quarter of 2012, it was determined that the fair value of our Molson core brands were at risk of failing step one of the impairment test, with the fair value of the Molson core brands estimated at approximately 14% in excess of its carrying value (of which $3,105.2 million is indefinite-lived intangibles as of September 29, 2012). The Molson core brands face similar risks and challenges as the Canada reporting unit, as described above. Additionally, our annual impairment testing of indefinite-lived intangibles indicated that the Carling brand in the U.K. (of which $324.0 million is indefinite-lived intangible as of September 29, 2012) continues to have a fair value significantly in excess of its carrying value.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our U.K. and Canada reporting units and Molson core brands may include such items as: (i) a decrease in expected future cash flows, specifically, an increase in required pension contributions, a decrease in sales volume, unfavorable working capital changes and an inability to successfully achieve our cost savings targets, (ii) an economic recovery that significantly differs from our assumptions in timing and/or degree, (iii) volatility in the equity and debt markets which could result in a higher discount rate; and (iv) sensitivity to market transaction multiples.
While historical performance and current expectations have resulted in fair values of our reporting units in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future.
Since its inception, the performance of our MC Si'hai joint venture (which is included in our China reporting unit with our other operations in China) did not meet our expectations due to delays in executing its business plans. As a result, our 2011 impairment testing indicated that the fair value of our China reporting unit only exceeded its carrying value by 4%. As part of the negotiations with our partner to resolve business difficulties and other issues affecting the joint venture, during the second quarter of 2012, we signed an agreement to acquire our partner's 49% noncontrolling interest in the joint venture. As of the end of the second quarter of 2012, there had been a lack of progress by our partner in timely satisfying the closing conditions, as well as delays and obstacles in gaining government approval for the acquisition of the noncontrolling interest, including a court order in China which prevented our joint venture partner from transferring its equity interest to us. These developments, coupled with the impact of increased competitive pressures in China were the combined trigger to review the future cash flows for the reporting unit. The subsequent testing identified that the full amount of the goodwill was impaired, resulting in a charge of $9.5 million in the second quarter of 2012. We also recognized an impairment charge on the definite-lived brand and distribution rights intangible assets of $0.9 million in the second quarter of 2012. Both of these charges are classified as Special items in our Condensed Consolidated Statements of Operations. In addition, as a result of recent developments identified in the third quarter of 2012, we deconsolidated our MC Si'hai joint venture and recorded an impairment loss of $27.6 million upon deconsolidation. See Note 5, "Investments" for further discussion.
Regarding definite-lived intangibles, we continuously monitor the performance of the underlying asset for potential triggering events suggesting an impairment review should be performed. No such triggering events were identified in the third quarter of 2012.
Debt
Debt
Debt
Debt obligations
Our total borrowings as of September 29, 2012, and December 31, 2011, were composed of the following:
 
As of
 
September 29, 2012
 
December 31, 2011
 
(In millions)
Senior notes:
 
 
 
$850 million 6.375% notes due 2012(1)
$

 
$
44.6

$575 million 2.5% convertible notes due 2013(2)
575.0

 
575.0

€500 million 0.0% convertible note due 2013(3)
672.0

 

CAD 900 million 5.0% notes due 2015
914.9

 
881.2

CAD 500 million 3.95% Series A notes due 2017
508.4

 
489.6

$300 million 2.0% notes due 2017(4)
300.0

 

$500 million 3.5% notes due 2022(4)
500.0

 

$1.1 billion 5.0% notes due 2042(4)
1,100.0

 

€120 million term loan due 2016(5)
120.5

 

Other long-term debt
0.6

 

Credit facilities(6)

 

Less: unamortized debt discounts and other(7)
(22.5
)
 
(30.8
)
Total long-term debt (including current portion)
4,668.9

 
1,959.6

Less: current portion of long-term debt
(1,230.8
)
 
(44.7
)
Total long-term debt
$
3,438.1

 
$
1,914.9

 
 
 
 
Short-term borrowings
$
27.8

 
$
2.2

Current portion of long-term debt
1,230.8

 
44.7

Current portion of long-term debt and short-term borrowings
$
1,258.6

 
$
46.9

(1)
During the second quarter of 2012, we repaid the remaining outstanding portion of our $850 million 6.375% 10-year notes that were due in May 2012.