MOLSON COORS BREWING CO, 10-Q filed on 8/8/2012
Quarterly Report
Document and Entity Information Document
6 Months Ended
Jun. 30, 2012
Aug. 2, 2012
Class A common stock, voting
Aug. 2, 2012
Class B common stock, non-voting
Aug. 2, 2012
Class A exchangeable shares
Aug. 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
Jun. 30, 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
 
2,583,694 
156,163,295 
 
 
Entity Exchangeable Shares Outstanding
 
 
 
2,939,701 
19,260,822 
Document Fiscal Year Focus
2012 
 
 
 
 
Document Fiscal Period Focus
Q2 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 25, 2011
Jun. 30, 2012
Jun. 25, 2011
Sales
$ 1,440.9 
$ 1,383.1 
$ 2,449.0 
$ 2,380.4 
Excise taxes
(441.5)
(449.5)
(758.2)
(756.4)
Net sales
999.4 
933.6 
1,690.8 
1,624.0 
Cost of goods sold
(580.1)
(523.9)
(1,018.9)
(951.1)
Gross profit
419.3 
409.7 
671.9 
672.9 
Marketing, general and administrative expenses
(304.8)
(272.5)
(553.0)
(510.9)
Special items, net
(21.2)
(11.0)
(22.7)
(11.0)
Equity income in MillerCoors
185.6 
171.8 
304.5 
273.0 
Operating income (loss)
278.9 
298.0 
400.7 
424.0 
Interest income (expense), net
(84.6)
(27.7)
(108.4)
(54.5)
Other income (expense), net
(70.5)
(1.8)
(71.9)
(2.5)
Income (loss) from continuing operations before income taxes
123.8 
268.5 
220.4 
367.0 
Income tax benefit (expense)
(25.9)
(43.2)
(43.2)
(59.3)
Net Income (loss) from continuing operations
97.9 
225.3 
177.2 
307.7 
Income (loss) from discontinued operations, net of tax
0.8 
(1.5)
0.9 
(1.2)
Net income (loss) including noncontrolling interests
98.7 
223.8 
178.1 
306.5 
Less: Net (income) loss attributable to noncontrolling interests
6.4 
(1.0)
6.5 
(0.8)
Net income (loss) attributable to Molson Coors Brewing Company
105.1 
222.8 
184.6 
305.7 
Basic net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
 
From continuing operations (in dollars per share)
$ 0.58 
$ 1.20 
$ 1.02 
$ 1.64 
From discontinued operations (in dollars per share)
$ 0.00 
$ (0.01)
$ 0.00 
$ (0.01)
Basic net income per share (in dollars per share)
$ 0.58 
$ 1.19 
$ 1.02 
$ 1.63 
Diluted net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
 
From continuing operations (in dollars per share)
$ 0.57 
$ 1.19 
$ 1.01 
$ 1.63 
From discontinued operations (in dollars per share)
$ 0.00 
$ (0.01)
$ 0.00 
$ (0.01)
Diluted net income per share (in dollars per share)
$ 0.57 
$ 1.18 
$ 1.01 
$ 1.62 
Weighted average shares - basic (in shares)
180.8 
187.1 
180.6 
187.0 
Weighted average shares - diluted (in shares)
181.6 
188.8 
181.6 
188.8 
Amounts attributable to Molson Coors Brewing Company
 
 
 
 
Net income (loss) from continuing operations
104.3 
224.3 
183.7 
306.9 
Income (loss) from discontinued operations, net of tax
0.8 
(1.5)
0.9 
(1.2)
Net income (loss) attributable to Molson Coors Brewing Company
$ 105.1 
$ 222.8 
$ 184.6 
$ 305.7 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 25, 2011
Jun. 30, 2012
Jun. 25, 2011
Net income (loss) including noncontrolling interests
$ 98.7 
$ 223.8 
$ 178.1 
$ 306.5 
Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustments
(64.2)
(34.7)
43.6 
127.0 
Amortization of net prior service costs and net actuarial losses
5.6 
(0.1)
15.5 
0.8 
Unrealized (loss) gain on derivative instruments
7.6 
1.4 
(10.2)
(6.1)
Reclassification adjustment on derivative instruments
1.7 
4.7 
3.5 
7.2 
Ownership share of unconsolidated subsidiaries' other comprehensive income (loss)
(0.1)
(4.0)
9.3 
8.9 
Total other comprehensive income (loss), net of tax
(49.4)
(32.7)
61.7 
137.8 
Comprehensive income (loss)
49.3 
191.1 
239.8 
444.3 
Less: Comprehensive income (loss) attributable to the noncontrolling interest
6.4 
(1.0)
6.5 
(0.8)
Comprehensive income (loss) attributable to MCBC
$ 55.7 
$ 190.1 
$ 246.3 
$ 443.5 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 516.0 
$ 1,078.9 
Accounts receivable, net
739.9 
588.8 
Other receivables, net
136.2 
137.2 
Inventories:
 
 
Finished, net
175.5 
140.7 
In process
28.5 
15.3 
Raw materials
43.6 
41.8 
Packaging materials, net
21.1 
9.4 
Total inventories, net
268.7 
207.2 
Other assets, net
140.4 
94.0 
Deferred tax assets
32.4 
11.6 
Discontinued operations
0.3 
Total current assets
1,833.6 
2,118.0 
Properties, net
1,977.7 
1,430.1 
Goodwill
2,288.0 
1,453.3 
Other intangibles, net
7,125.3 
4,586.0 
Investment in MillerCoors
2,605.8 
2,487.9 
Deferred tax assets
154.4 
149.9 
Notes receivable, net
27.6 
32.7 
Other assets
224.3 
165.9 
Total assets
16,236.7 
12,423.8 
Current liabilities :
 
 
Accounts payable
492.0 
301.2 
Accrued expenses and other liabilities
799.4 
646.8 
Derivative hedging instruments
6.4 
107.6 
Deferred tax liabilities
171.5 
161.3 
Current portion of long-term debt and short-term borrowings
802.5 
46.9 
Discontinued operations
14.3 
13.4 
Total current liabilities
2,286.1 
1,277.2 
Long-term debt
4,097.9 
1,914.9 
Pension and post-retirement benefits
687.2 
697.5 
Derivative hedging instruments
209.8 
212.5 
Deferred tax liabilities
883.8 
455.6 
Unrecognized tax benefits
89.1 
76.4 
Other liabilities
80.5 
77.5 
Discontinued operations
20.4 
22.0 
Total liabilities
8,354.8 
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
3,604.6 
3,572.1 
Retained earnings
3,758.4 
3,689.7 
Accumulated other comprehensive income (loss)
(68.0)
(129.7)
Class B common stock held in treasury at cost (7.5 shares at June 30, 2012 and December 31, 2011)
(321.1)
(321.1)
Total Molson Coors Brewing Company stockholders' equity
7,810.8 
7,647.9 
Noncontrolling interests
71.1 
42.3 
Total equity
7,881.9 
7,690.2 
Total liabilities and equity
16,236.7 
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
Jun. 30, 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
163.7 
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
6 Months Ended
Jun. 30, 2012
Jun. 25, 2011
Cash flows from operating activities:
 
 
Net income (loss) including noncontrolling interests
$ 178.1 
$ 306.5 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
111.8 
107.1 
Amortization of debt issuance costs and discounts
25.0 
10.6 
Share-based compensation
10.1 
14.4 
Loss on sale or impairment of properties and intangibles
21.1 
8.6 
Deferred income taxes
5.5 
1.8 
Equity income in MillerCoors
(304.5)
(273.0)
Distributions from MillerCoors
304.5 
273.0 
Equity in net income of other unconsolidated affiliates
(6.5)
(9.9)
Distributions from other unconsolidated affiliates
11.8 
21.7 
Excess tax benefits from share-based compensation
(3.5)
(0.9)
Change in current assets and liabilities and other, net of affect of Acquisition
44.9 
(189.3)
(Gain) loss from discontinued operations
(0.9)
1.2 
Net cash provided by operating activities
397.4 
271.8 
Cash flows from investing activities:
 
 
Additions to properties
(81.4)
(72.5)
Proceeds from sales of properties and intangible assets
1.3 
1.2 
Acquisition of businesses, net of cash acquired
(2,257.4)
(41.3)
Change in restricted cash balances
2.7 
Investment in MillerCoors
(565.7)
(470.4)
Return of capital from MillerCoors
459.9 
376.4 
Proceeds from settlements of derivative instruments
15.4 
Payments on settlement of derivative instruments
(110.6)
Investment in and advances to an unconsolidated affiliate
(3.7)
(5.7)
Trade loan repayments from customers
9.5 
7.6 
Trade loans advanced to customers
(4.6)
(5.2)
Net cash used in investing activities
(2,552.7)
(191.8)
Cash flows from financing activities:
 
 
Exercise of stock options under equity compensation plans
20.8 
6.3 
Excess tax benefits from share-based compensation
3.5 
0.9 
Dividends paid
(115.9)
(112.1)
Dividends paid to noncontrolling interests holders
(2.9)
(1.5)
Debt issuance costs
(39.2)
(2.2)
Proceeds from issuances of long-term debt
2,195.4 
Payments on long-term debt and capital lease obligations
(44.8)
Payments on debt assumed in acquisition
(424.3)
Proceeds from short-term borrowings
2.5 
6.8 
Payments on short-term borrowings
(13.5)
(15.3)
Payments on settlement of derivative instruments
(4.0)
Net (payments) proceeds from revolving credit facilities
3.9 
2.6 
Change in overdraft balances and other
2.1 
(10.8)
Net cash provided by financing activities
1,583.6 
(125.3)
Cash and cash equivalents:
 
 
Net increase (decrease) in cash and cash equivalents
(571.7)
(45.3)
Effect of foreign exchange rate changes on cash and cash equivalents
8.8 
11.9 
Balance at beginning of year
1,078.9 
1,217.6 
Balance at end of period
$ 516.0 
$ 1,184.2 
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.
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 second quarter or first half of 2012. The results of operations for the 13 and 26 weeks ended June 30, 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 second quarter of 2012 and 2011 refers to the 13 weeks ended June 30, 2012, and June 25, 2011, respectively. The first half of 2012 and 2011 refers to the 26 weeks ended June 30, 2012, and June 25, 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 second quarter and first half of 2012 and 2011 refer to the three and six months ended June 30, 2012, and June 30, 2011, respectively, except for MCCE where the second quarter and first half of 2012 refer to the two week period from the Acquisition date of June 15, 2012 through June 30, 2012.
Consistent with the disclosure in the Annual Report, these significant accounting policies include our treatment of the allowance for credit losses on our MCBC-UK trade loan portfolio. This allowance is maintained to provide for loan losses deemed to be probable related to specifically identified loans and for losses in the loan portfolio that have been incurred at the balance sheet date. We establish our allowance through a provision for loan losses charged against earnings and recorded in Marketing, general and administrative expenses. Loan balances that are written off are recorded against the allowance as a write-off. A rollforward of the allowance for the first half ended June 30, 2012, and June 25, 2011, is as follows (in millions):
 
As of
 
June 30, 2012
June 25, 2011
Balance at beginning of the year
$
6.2

$
9.1

Addition charged to expense, net of recoveries
2.4

(0.6
)
Write-offs
(1.3
)
(0.5
)
Foreign currency and other adjustments

0.2

Balance at end of second quarter
$
7.3

$
8.2

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 tests performed for our fiscal years beginning January 1, 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. However, we are currently evaluating the impact of this guidance on our existing disclosures.
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 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 goodwill impairment tests 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 will take place in the third quarter. This guidance does not 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. It also sells its brands 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. We incurred acquisition-related costs of $25.3 million and $31.4 million, included in Marketing general and administrative expenses in the second quarter and first half 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 $57.3 million and Income from continuing operations before income taxes of $12.4 million from the Acquisition date of June 15, 2012 through June 30, 2012. 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 purchase and the removal of the previously mentioned acquisition-related costs. Additional significant adjustments include the removal of the following non-recurring, transaction-related costs: a $57.9 million Euro currency loss, a $39.2 million Treasury Lock loss, 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
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Net sales
$
1,200.5

 
$
1,231.5

 
$
2,031.3

 
$
2,069.4

Income from continuing operations before income taxes
279.7

 
315.8

 
347.5

 
395.3

Net income attributable to MCBC
$
241.4

 
$
267.3

 
$
299.4

 
$
336.6

Net income per common share attributable to MCBC:
 
 
 
 
 
 
 
         Basic
$
1.33

 
$
1.43

 
$
1.65

 
$
1.80

         Diluted
$
1.32

 
$
1.41

 
$
1.64

 
$
1.78


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 and 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 close 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. See Note 13, "Debt" for further discussion.
(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.
Preliminary 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 are subject to revision when our valuation and tax-related adjustments are finalized, which we expect to occur during 2012.
 
Fair Value
 
(In millions)
Cash and cash equivalents
$
143.6

Current assets(1)
262.1

Properties, net
555.6

Other intangibles, net(2)
2,525.1

Other assets
44.5

Total assets acquired
$
3,530.9

Current liabilities(3)
846.0

Non-current liabilities(4)
431.0

Total liabilities assumed
$
1,277.0

Total identifiable net assets
$
2,253.9

Noncontrolling interest measured at fair value
38.5

Goodwill(5)
831.5

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 $409.9 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. All of the goodwill was preliminarily assigned to the new Central Europe segment and 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.
The following table sets forth net sales by segment:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Canada
$
582.9

 
$
564.7

 
$
985.2

 
$
958.5

Central Europe(1)
57.3

 

 
57.3

 

U.K. 
326.2

 
341.7

 
589.6

 
616.4

MCI
37.1

 
28.2

 
65.2

 
49.8

Corporate
0.4

 
0.3

 
0.7

 
0.6

Eliminations(2)
(4.5
)
 
(1.3
)
 
(7.2
)
 
(1.3
)
         Consolidated
$
999.4

 
$
933.6

 
$
1,690.8

 
$
1,624.0

(1)
Represents Central Europe net sales from the Acquisition date of June 15, 2012 through June 30, 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 external customers.
The following table sets forth income (loss) from continuing operations before income taxes by segment:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Canada
$
139.9

 
$
131.8

 
$
183.8

 
$
184.0

U.S. 
185.6

 
171.8

 
304.5

 
273.0

Central Europe(1)
12.4

 

 
12.4

 

U.K. 
16.3

 
32.3

 
17.6

 
39.1

MCI
(24.3
)
 
(10.6
)
 
(32.9
)
 
(18.0
)
Corporate
(206.1
)
 
(56.8
)
 
(265.0
)
 
(111.1
)
         Consolidated
$
123.8

 
$
268.5

 
$
220.4

 
$
367.0

(1)
Represents Central Europe income from continuing operations before income taxes from the Acquisition date of June 15, 2012 through June 30, 2012.
The following table sets forth total assets by segment:
 
As of
 
June 30, 2012
 
December 31, 2011
 
(In millions)
Canada
$
6,347.8

 
$
6,541.6

U.S. 
2,605.8

 
2,487.9

Central Europe
4,464.5

 

U.K. 
2,231.9

 
2,293.4

MCI
136.6

 
151.7

Corporate
450.1

 
948.9

Discontinued operations

 
0.3

         Consolidated
$
16,236.7

 
$
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 VIEs included under "Consolidated Investments" 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
 
June 30, 2012
 
December 31, 2011
 
(In millions)
Current assets
$
1,040.0

 
$
810.9

Non-current assets
8,839.9

 
8,861.7

Total assets
$
9,879.9

 
$
9,672.6

Current liabilities
$
926.8

 
$
922.7

Non-current liabilities
1,392.3

 
1,471.3

Total liabilities
2,319.1

 
2,394.0

Noncontrolling interests
42.5

 
36.7

Owners' equity
7,518.3

 
7,241.9

Total liabilities and equity
$
9,879.9

 
$
9,672.6

Results of Operations
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
 
(In millions)
Net sales
$
2,224.0

 
$
2,132.3

 
$
3,983.8

 
$
3,831.4

Cost of goods sold
(1,311.8
)
 
(1,268.8
)
 
(2,381.8
)
 
(2,331.8
)
Gross profit
$
912.2

 
$
863.5

 
$
1,602.0

 
$
1,499.6

Operating income
$
444.4

 
$
406.4

 
$
723.4

 
$
645.1

Net income attributable to MillerCoors
$
438.3

 
$
398.7

 
$
713.6

 
$
633.4

The following represents MCBC's proportional share in net income attributable to MillerCoors reported under the equity method:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions, except percentages)
Net income attributable to MillerCoors
$
438.3

 
$
398.7

 
$
713.6

 
$
633.4

MCBC economic interest
42
%
 
42
%
 
42
%
 
42
%
MCBC proportionate share of MillerCoors net income
184.1

 
167.4

 
299.7

 
266.0

Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1)
1.5

 
2.5

 
1.9

 
4.9

Share-based compensation adjustment(2)

 
1.9

 
2.9

 
2.1

Equity income in MillerCoors
$
185.6

 
$
171.8

 
$
304.5

 
$
273.0

(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 $587 million as of June 30, 2012. This difference, with the exception of goodwill and land, is being 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.
During the second quarter of 2012, we had $5.3 million of beer sales to MillerCoors and $3.1 million of beer purchases from MillerCoors. During the second quarter of 2011, we had $9.5 million of beer sales to MillerCoors and $2.2 million of beer purchases from MillerCoors. During the first half of 2012, we had $10.2 million of beer sales to MillerCoors and $5.4 million of beer purchases from MillerCoors. During the first half of 2011, we had $17.5 million of beer sales to MillerCoors and $4.7 million of beer purchases from MillerCoors.
For the second quarter of 2012, we recorded $0.9 million of service agreement costs and other charges to MillerCoors and $0.4 million of service agreement costs from MillerCoors. For the second quarter of 2011, we recorded $2.0 million of service agreement costs and other charges to MillerCoors and $1.9 million of service agreement costs from MillerCoors. For the first half of 2012, we recorded $2.0 million of service agreement costs and other charges to MillerCoors and $0.6 million of service agreement costs from MillerCoors. For the first half of 2011, we recorded $3.4 million of service agreement costs and other charges to MillerCoors and $2.1 million of service agreement costs from MillerCoors.
As of June 30, 2012, and December 31, 2011, we had $1.4 million of net payables due to MillerCoors and $2.0 million of net receivables due from MillerCoors, respectively.
Consolidated Investments
The following summarizes the assets of our consolidated VIEs, including noncontrolling interests. None of our consolidated VIEs held debt as of June 30, 2012, or December 31, 2011.
 
As of
 
June 30, 2012
 
December 31, 2011
 
Total assets
 
(In millions)
Grolsch
$
16.3

 
$
20.4

Cobra U.K.
$
29.8

 
$
31.6

The following summarizes the results of operations of our consolidated VIEs (including noncontrolling interests).
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
(In millions)
Grolsch(1)
$
6.4

 
$
0.9

 
$
7.7

 
$
1.9

 
$
11.6

 
$
1.7

 
$
12.9

 
$
2.6

Cobra U.K.
$
10.8

 
$
1.7

 
$
10.3

 
$
2.1

 
$
19.0

 
$
2.1

 
$
18.6

 
$
3.1

(1)
Substantially all such sales for Grolsch are made to us and as such, are eliminated in consolidation.
Share-Based Payments
Share-Based Payments
Share-Based Payments
During the first half 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 components of the share-based compensation expense:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Stock options and SOSARs
 
 
 
 
 
 
 
Pre-tax compensation expense
$
0.7

 
$
1.1

 
$
2.6

 
$
3.9

Tax benefit
(0.2
)
 
(0.3
)
 
(0.8
)
 
(1.1
)
After-tax compensation expense
$
0.5

 
$
0.8

 
$
1.8

 
$
2.8

RSUs and DSUs
 
 
 
 
 
 
 
Pre-tax compensation expense
$
2.5

 
$
3.1

 
$
4.6

 
$
5.4

Tax benefit
(0.7
)
 
(0.8
)
 
(1.3
)
 
(1.3
)
After-tax compensation expense
$
1.8

 
$
2.3

 
$
3.3

 
$
4.1

PUs
 
 
 
 
 
 
 
Pre-tax compensation expense
$
1.9

 
$
2.0

 
$
2.9

 
$
5.0

Tax benefit
(0.5
)
 
(0.6
)
 
(0.9
)
 
(1.5
)
After-tax compensation expense
$
1.4

 
$
1.4

 
$
2.0

 
$
3.5

Total after-tax compensation expense
$
3.7

 
$
4.5

 
$
7.1

 
$
10.4


During the first half of 2012, we granted 0.2 million stock options, 0.3 million RSUs and 0.7 million PUs, all of which were outstanding, other than an insignificant amount of cancellations, as of June 30, 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 an expense of $0.1 million and a benefit of $0.1 million during the second quarter of 2011 and first half of 2011, respectively. We did not record an adjustment in the second quarter of 2012 or first half 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. These amounts are included in the table above.
As of June 30, 2012, there was $32.5 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 1.6 years.
The following table represents the summary of stock options and SOSARs outstanding as of June 30, 2012, and the activity during the first half 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
0.2
 
$42.80
 
 
 
 
Exercised
(0.7)
 
$30.06
 
 
 
 
Forfeited
(0.1)
 
$46.86
 
 
 
 
Outstanding as of June 30, 2012
6.5
 
$39.70
 
4.28
 
$
26.0

Exercisable at June 30, 2012
5.6
 
$39.09
 
3.63
 
$
26.0

The total intrinsic value of options exercised during the first half of 2012 and 2011 was $9.6 million and $2.1 million, respectively. During the first half of 2012, cash received from stock option exercises was $20.8 million and the total net tax benefit to be realized for the tax deductions from these option exercises was $3.2 million.
The following table represents non-vested RSUs, DSUs and PUs as of June 30, 2012, and the activity during the first half 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)
 
(In millions, except
per unit amounts)
Non-vested as of December 31, 2011
0.6

 
$43.35
 
2.0

 
$11.67
Granted
0.3

 
$42.12
 
0.7

 
$14.35
Vested
(0.2
)
 
$42.46
 
(0.7
)
 
$10.92
Forfeited

 
$43.35
 
(0.1
)
 
$11.20
Non-vested as of June 30, 2012
0.7

 
$43.20
 
1.9

 
$11.41
The fair value of each option granted in the first half of 2012 and 2011, respectively, was determined on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
Risk-free interest rate
1.56%
 
2.55%
Dividend yield
2.98%
 
2.52%
Volatility range
25.80%-27.56%
 
25.26%-28.11%
Weighted-average volatility
25.84%
 
26.37%
Expected term (years)
4.0-7.7
 
4.0-7.7
Weighted-average fair market value
$8.18
 
$9.66
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 historical 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 June 30, 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.
Summary of Special Items
The table below summarizes special items recorded by segment:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Employee related charges
 
 
 
 
 
 
 
Restructuring
 
 
 
 
 
 
 
Canada
$

 
$
0.6

 
$
1.6

 
$
0.6

U.K.
4.5

 
2.4

 
6.3

 
2.7

Corporate

 

 
1.1

 

Special termination benefits
 
 
 
 
 
 
 
Canada(1)
1.4

 
1.2

 
1.9

 
4.0

Impairments or asset abandonment charges
 
 
 
 
 
 
 
U.K. - Asset abandonment(2)
7.2

 

 
7.2

 

MCI - China impairment(3)
10.4

 

 
10.4

 

Unusual or infrequent items
 
 
 
 
 
 
 
Canada - Flood insurance reimbursement(4)
(2.3
)
 
0.7

 
(2.3
)
 
0.1

Canada - Brewers' Retail, Inc. ("BRI") loan guarantee adjustment(5)

 
(2.0
)
 

 
(2.0
)
Canada - Fixed asset adjustment(6)

 
7.6

 

 
7.6

U.K. - Release of non-income-related tax reserve(7)

 

 
(3.5
)
 
(2.5
)
MCI - Costs associated with outsourcing and other strategic initiatives

 
0.5

 

 
0.5

Total Special items, net
$
21.2

 
$
11.0

 
$
22.7

 
$
11.0

(1)
During the second quarters and first halves 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.
(2)
During the second quarter of 2012, we recognized an asset abandonment charge related to the discontinuation of primary packaging in the U.K. We determined that our Home Draft package 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.
(3)
See related detail in Note 12 "Goodwill and Intangible Assets."     
(4)
In the second quarter and first half of 2012, we received insurance proceeds in excess of expenses incurred related to the flood damages at our Toronto offices. During the second quarter and first half of 2011, we incurred expenses related to these damages, which were partially offset by insurance proceeds.
(5)
During the second quarter of 2011, we recognized a gain resulting from a reduction of our guarantee of BRI debt obligations, which is discussed further in Note 16 "Commitments and Contingencies."
(6)
During the second quarter 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.
(7)
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
 
U.K.
 
Corporate
 
Total
 
(In millions)
Total at December 31, 2011
$
0.1

 
$
1.8

 
$

 
$
1.9

Charges incurred
1.6

 
6.3

 
1.1

 
9.0

Payments made
(0.7
)
 
(1.7
)
 

 
(2.4
)
Foreign currency and other adjustments

 
(0.3
)
 

 
(0.3
)
Total at June 30, 2012
$
1.0

 
$
6.1

 
$
1.1

 
$
8.2

Other Income and Expense
Other Income and Expense
Other Income and Expense
The table below summarizes other income and expense:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Bridge facility fees(1)
$
(13.0
)
 
$

 
$
(13.0
)
 
$

Euro currency purchase loss(2)
(57.9
)
 

 
(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
(0.6
)
 
(3.3
)
 
(2.3
)
 
(4.0
)
Environmental reserve

 
0.1

 

 
(0.1
)
Other, net
1.0

 
1.4

 
1.3

 
0.8

Other income (expense), net
$
(70.5
)
 
$
(1.8
)
 
$
(71.9
)
 
$
(2.5
)
(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. 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 January 2011, we settled our remaining Foster's Group Limited's ("Fosters") total return swap and related financial instruments.
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 second quarters of 2012 and 2011, we recognized a gain of $2.3 million and a loss of $1.5 million, respectively, from discontinued operations associated with a change in legal reserve, foreign exchange gains and losses related to indemnities we provided to FEMSA with regard to contingent tax and other liabilities. During the first half of 2012 and 2011, we recognized a gain of $2.4 million and a loss of $1.2 million, respectively. See further discussion in Note 16, "Commitments and Contingencies."
As of June 30, 2012, and December 31, 2011, current liabilities of discontinued operations include current legal reserves of $6.3 million and $4.8 million, respectively. During the second quarter of 2012, we recognized a loss of $1.5 million related to an increase in the legal reserve to the agreed upon settlement amount in the distributorship litigation. Subsequent to the end of the second quarter 2012, we finalized the settlement for the $6.3 million accrued at June 30, 2012. See further discussion in Note 16, "Commitments and Contingencies."
Income Tax
Income Tax
Income Tax
Our effective tax rates for the second quarters of 2012 and 2011 were approximately 21% and 16%, respectively. For the first half of 2012 and 2011, our effective tax rates were approximately 20% and 16%, respectively. Our effective tax rate estimate for the full year is based on the preliminary purchase accounting for the Acquisition 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 is non-current. As of June 30, 2012, Unrecognized tax benefits increased by $14.7 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 half of 2012. This results in Unrecognized tax benefits including interest, penalties and offsetting positions of $92.1 million as of June 30, 2012, of which $3.0 million is current and included in Accrued expenses and other liabilities and $89.1 million is non-current.
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 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 Europe 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
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Amounts attributable to MCBC
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
104.3

 
$
224.3

 
$
183.7

 
$
306.9

Income (loss) from discontinued operations, net of tax
0.8

 
(1.5
)
 
0.9

 
(1.2
)
Net income (loss) attributable to MCBC
$
105.1

 
$
222.8

 
$
184.6

 
$
305.7

Weighted average shares for basic EPS
180.8

 
187.1

 
180.6

 
187.0

Effect of dilutive securities:
 
 
 
 
 
 
 
Options and SOSARs
0.4

 
1.0

 
0.5

 
1.0

RSUs, PUs and DSUs
0.4

 
0.7

 
0.5

 
0.8

Weighted average shares for diluted EPS
181.6

 
188.8

 
181.6

 
188.8

Basic net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations attributable to MCBC
$
0.58

 
$
1.20

 
$
1.02

 
$
1.64

Discontinued operations attributable to MCBC

 
(0.01
)
 

 
(0.01
)
Net income attributable to MCBC
$
0.58

 
$
1.19

 
$
1.02

 
$
1.63

Diluted net income (loss) per share:
 
 
 
 
 
 
 
Continuing operations attributable to MCBC
$
0.57

 
$
1.19

 
$
1.01

 
$
1.63

Discontinued operations attributable to MCBC

 
(0.01
)
 

 
(0.01
)
Net income attributable to MCBC
$
0.57

 
$
1.18

 
$
1.01

 
$
1.62

Dividends declared and paid per share
$
0.32

 
$
0.32

 
$
0.64

 
$
0.60

The following anti-dilutive securities were excluded from the computation of the effect of dilutive securities on diluted earnings per share:
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
June 30, 2012
 
June 25, 2011
 
June 30, 2012
 
June 25, 2011
 
(In millions)
Stock options, SOSARs and RSUs(1)
2.1

 
0.7

 
1.4

 
0.6

Shares of Class B common stock issuable upon assumed conversion of the 2.5% Convertible Senior Notes(2)
10.9

 
10.7

 
10.9

 
10.7

Warrants to issue shares of Class B common stock(2)
10.9

 
10.7

 
10.9

 
10.7

Shares of Class B common stock issuable upon assumed conversion of the €500 million Convertible Note(3)
0.4

 

 
0.2

 

 
24.3

 
22.1

 
23.4

 
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)
We issued $575 million of senior convertible notes in June 2007. 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 $52.57. 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 $67.30. The potential receipt of MCBC stock from counterparties under our purchased call options when and if our stock price is between $52.57 and $67.30 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 $49.12 based on foreign exchange rates at June 30, 2012. See further discussion in Note 13, "Debt."
We have no outstanding equity share awards that contain non-forfeitable rights to dividends on unvested shares.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets
The following summarizes the change in goodwill for the second quarter of 2012 (in millions):
Balance at December 31, 2011
$
1,453.3

Business acquisition(1)
831.5

Impairment related to China reporting unit(2)
(9.5
)
Foreign currency translation
12.3

Purchase price adjustment
0.4

Balance at June 30, 2012
$
2,288.0

(1)
On June 15, 2012, we completed the Acquisition. See Note 3, "Acquisition of StarBev" for further discussion.
(2)
See further discussion below.
Goodwill was attributed to our segments as follows:
 
As of
 
June 30, 2012
 
December 31, 2011
 
(In millions)
Canada
$
692.7

 
$
689.5

Central Europe(1)
833.4

 

United Kingdom
753.9

 
746.1

MCI
8.0

 
17.7

Consolidated
$
2,288.0

 
$
1,453.3

(1)
We have initially attributed the preliminary goodwill arising from the Acquisition to our Central Europe segment. This allocation is subject to change as we finalize purchase accounting, which we expect to occur during 2012.
The following table presents details of our intangible assets, other than goodwill, as of June 30, 2012:
 
Useful life
 
Gross
 
Accumulated
amortization
 
Net
 
(Years)
 
(In millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Brands(1)
 3 - 40
 
$
456.3

 
$
(189.6
)
 
$
266.7

Distribution rights
 2 - 23
 
343.7

 
(242.5
)
 
101.2

Patents and technology and distribution channels
 3 - 10
 
34.3

 
(30.4
)
 
3.9

Favorable contracts, land use rights and other(1)
 2 - 42
 
18.3

 
(1.2
)
 
17.1

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Brands(1)
 Indefinite
 
5,725.8

 

 
5,725.8

Distribution networks
 Indefinite
 
995.1

 

 
995.1

Other
 Indefinite
 
15.5

 

 
15.5

Total
 
 
$
7,589.0

 
$
(463.7
)
 
$
7,125.3

(1)
Includes the preliminary fair values of $135.6 million for brand intangibles with a 30 year useful life, $2,377.5 million 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 June 30, 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 June 30, 2012, the following is our estimated amortization expense related to intangible assets for the next five years:
 
Amount
 
(In millions)
2012 - remaining
$
23.2

2013
$
46.4

2014
$
38.5

2015
$
36.0

2016
$
36.0


Amortization expense of intangible assets was $9.3 million and $10.5 million for the second quarter of 2012 and 2011, respectively, and $18.6 million and $20.3 million for the first half 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 June 26, 2011, and determined that there were no impairments of goodwill or other indefinite-lived intangible assets. We are in process of performing our annual impairment testing as of July 1, 2012.
As of June 30, 2012, we had $753.9 million of goodwill and $315.9 million of indefinite-lived intangibles associated with our U.K. reporting unit and Carling brand, respectively, which originated from our acquisition of Coors Brewers Limited in 2002. Our annual impairment testing in 2011 revealed that the fair value of the U.K. reporting unit and the Carling brand was more than 25% and 175%, respectively, in excess of their carrying values. In recent quarters our U.K. business, along with other U.K. corporations across all industries, has been adversely impacted by the soft economy both in the U.K. and Europe. If this continues, a future impairment charge may be required.
Through our annual impairment testing in 2011, we determined that the fair value of our China reporting unit, included in MCI, was not significantly in excess of its carrying value. Since its inception, the performance of the Molson Coors Si'hai joint venture (which is included in our China reporting unit with our other operations in China) has not met our expectations due to delays in executing its business plans. As a result, the fair value of our China reporting unit only exceeded its carrying value by 4%. We have held ongoing negotiations with our joint venture partner intended to overcome these business difficulties and other issues affecting the joint venture. As part of the negotiations to resolve these issues with our partner, during the second quarter of 2012, we signed an agreement to acquire our partner's 49% noncontrolling interest in the joint venture. Since the execution of the agreement, there has been a lack of progress by our partner in timely satisfying the closing conditions, as well as delays and new obstacles in gaining government approval for the acquisition of the noncontrolling interest, including a court order in China which prevents 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. Additionally, in the second quarter of 2012, we recognized an impairment charge on the definite-lived brand and distribution rights intangible assets of $0.9 million. Both of these charges are classified as Special items in our Condensed Consolidated Statements of Operations. In addition, as a result of the recent developments, we believe there is a substantial likelihood the closing conditions in the agreement with our joint venture partner will not be satisfied, which will result in the closing of the purchase of our joint venture partner's equity interest not occurring on the terms contemplated by the agreement previously signed, or at all. In that scenario, we will consider other alternatives, which may require us to record further costs and potential incremental asset impairment charges in the future related to our China reporting unit.
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 second quarter of 2012, except as noted above related to our China reporting unit.

Debt
Debt
Debt
Long-term borrowings
Our total long-term borrowings as of June 30, 2012, and December 31, 2011, were composed of the following:
 
As of
 
June 30, 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)
654.2

 

CAD 900 million 5.0% notes due 2015
885.3

 
881.2

CAD 500 million 3.95% Series A notes due 2017
491.8

 
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

 

$150 million term loan due 2016(5)
150.0

 

€120 million term loan due 2016(5)
151.6

 

Other long-term debt(6)
0.6

 

Credit facilities(7)

 

Less: unamortized debt discounts and other(8)
(27.5
)
 
(30.8
)
Total long-term debt (including current portion)
4,781.0

 
1,959.6

Less: current portion of long-term debt
(683.1
)
 
(44.7
)
Total long-term debt
$
4,097.9

 
$
1,914.9

(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.
(2)
The original conversion price for each $1,000 aggregate principal amount of notes was $54.76 per share of our Class B common stock, which represented a 25% premium above the stock price on the day of issuance of the notes and corresponded to the initial conversion ratio of 18.263 shares per each $1,000 aggregate principal amount of notes. The conversion ratio and conversion price are subject to adjustments for certain events and provisions, as defined in the indenture. As of March 2012, our conversion price and ratio are $52.79 and 18.9441 shares, respectively. Currently, the convertible debt's if-converted value does not exceed the principal.
During the second quarters of 2012 and 2011, we incurred additional non-cash interest expense of $4.5 million and $4.4 million, respectively. For the first half of 2012 and 2011, the amounts were $9.0 million and $8.7 million, respectively. We also incurred interest expense related to the 2.5% convertible coupon rate of $3.6 million during both the second quarters of 2012 and 2011. For the first half of 2012 and 2011, the interest expenses incurred were $7.3 million and $7.2 million, respectively. The combination of non-cash and cash interest resulted in an effective interest rate of 5.83% and 5.91% for the second quarters of 2012 and 2011, respectively. The effective interest rates for the first half of 2012 and 2011 were 5.84% and 5.92%, respectively. In relation to this issuance, paid in capital in the equity section of our balance sheet includes $103.9 million, ($64.2 million net of tax), representing the equity component of the convertible debt. Further, as of June 30, 2012, and December 31, 2011, $19.9 million and $28.9 million, respectively, of the unamortized debt discount and other balance relates to our $575 million convertible debt. We expect to record additional non-cash interest expense of approximately $9 million in 2012 and $11 million in 2013, thereby increasing the carrying value of the convertible debt to its $575 million face value at maturity in July 2013.
(3)
On June 15, 2012, we issued a €500 million Zero Coupon Senior Unsecured Convertible Note due 2013 (the ''Convertible Note'') to the Seller in conjunction with the closing of the Acquisition. The Convertible Note matures on December 31, 2013, and is a senior unsecured obligation guaranteed by MCBC. The Seller may exercise a put right with respect to the Convertible Note beginning on March 14, 2013, (the “First Redemption Date”) and ending on December 19, 2013, for the greater of the principal amount of the Convertible Note or the aggregate cash value of 12,894,044 shares of our Class B Common Stock, as adjusted for certain corporate events. The Convertible Note's embedded conversion feature was determined to meet the definition of a derivative required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. At issuance, we recorded a liability of €12.1 million (or $15.2 million) related to the conversion feature. See Note 14, "Derivative Instruments and Hedging Activities" for further discussion of the derivative. The Convertible Note was issued at a discount of €1.0 million (or $1.3 million) which will be recognized as interest expense over the period from issuance to the First Redemption Date.
The carrying value of the Convertible Note and fair value of the conversion feature at June 30, 2012,was $632.2 million and $20.8 million, respectively. As of June 30, 2012, we recognized an unrealized loss of $5.6 million recorded in Interest expense related to changes in the fair value of the conversion feature, and $0.1 million in non-cash interest expense related to amortization of the debt discount. The non-cash interest, excluding the change in fair value of the convertible feature, resulted in an effective interest rate of 0.25% for the second quarter and first half of 2012.
</
(4)
On May 3, 2012, we issued $1.9 billion of senior notes with portions maturing in 2017, 2022 and 2042. The 2017 senior notes were issued in an initial aggregate principal amount of $300 million at 2.0% interest and will mature on May 1, 2017. The 2022 senior notes were issued in an initial aggregate principal amount of $500 million at 3.5% interest and will mature on May 1, 2022. The 2042 senior notes were issued in an initial aggregate principal amount of $1.1 billion at 5.0% interest and will mature on May 1, 2042. The issuance resulted in total proceeds to us, before expenses, of $1,880.7 million, net of underwriting fees and discounts of $14.7 million and $4.6 million, respectively. Total debt issuance costs capitalized in connection with these senior notes, including the $14.7 million of underwriting fees, are approximately $18 million and will be amortized over the life of the notes. The issuance adds a number of guarantors to these debt securities as well as to our existing senior obligations, pursuant to requirements of our existing senior debt obligation agreements. These new guarantors consist principally of the U.K. operating entity. See Note 17, "Supplemental Guarantor Information" for further discussion and guarantor financial information reflective of this change.