UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2003
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14829
ADOLPH COORS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE
84-0178360
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
311 Tenth Street, Golden, Colorado
80401
(Address of principal executive offices)
(Zip Code)
303-279-6565
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of October 31, 2003:
Class A Common Stock – 1,260,000 shares
Class B Common Stock – 35,141,521 shares
ADOLPH COORS COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended September 28, 2003, and September 29, 2002
Condensed Consolidated Balance Sheets at September 28, 2003, and December 29, 2002
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 28, 2003, and September 29, 2002
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
2
ITEM 1. FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirteen Weeks Ended
Thirty-nine Weeks Ended
September 28,2003
September 29,2002
Sales (Note 1)
$
1,420,191
1,322,722
3,990,417
3,630,003
Beer excise taxes
(371,467
)
(321,124
(1,013,176
(834,814
Net sales
1,048,724
1,001,598
2,977,241
2,795,189
Cost of goods sold (Note 1)
(658,016
(636,094
(1,900,577
(1,758,458
Gross profit
390,708
365,504
1,076,664
1,036,731
Marketing, general and administrative expenses
(281,313
(276,359
(835,435
(778,084
Special charges, net
—
(1,802
Operating income
109,395
89,145
241,229
256,845
Gain on sales of securities
4,003
Interest income
4,742
5,689
14,604
16,297
Interest expense
(18,381
(21,805
(62,215
(50,778
Other (expense) income, net (Note 1)
(1
1,552
6,291
(95
Income before income taxes
95,755
74,581
199,909
226,272
Income tax expense
(34,327
(27,962
(61,333
(84,834
Net income
61,428
46,619
138,576
141,438
Net income per common share – basic
1.69
1.29
3.81
3.92
Net income per common share – diluted
1.68
1.28
3.79
3.88
Weighted average shares – basic
36,339
36,193
36,325
36,094
Weighted average shares – diluted
36,575
36,537
36,553
36,497
Cash dividends declared and paid per share
0.205
0.615
See notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 29,2002
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
31,251
59,167
Accounts receivable, net
577,174
621,046
Other receivables, net
112,344
84,380
Inventories, net:
Finished
81,910
86,372
In process
31,313
31,850
Raw materials
72,934
56,239
Packaging materials
10,367
10,210
Total inventories, net
196,524
184,671
Deferred tax asset
11,126
20,976
Other current assets
119,939
83,656
Total current assets
1,048,358
1,053,896
Properties, net
1,390,619
1,380,239
Goodwill
747,072
727,069
Other intangibles, net
529,177
529,076
Investments in joint ventures
188,202
191,184
Long-term deferred tax asset
184,043
206,400
Other non-current assets
199,944
209,547
Total assets
4,287,415
4,297,411
4
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
315,497
334,647
Accrued salaries and vacations
57,497
79,001
Taxes, other than income
168,597
178,044
Accrued expenses and other liabilities
383,285
412,150
Short-term borrowings
9,514
101,654
Current portion of long-term debt
85,104
42,395
Total current liabilities
1,019,494
1,147,891
Long-term debt
1,275,623
1,383,392
Deferred tax liability
180,912
156,437
Other long-term liabilities
662,528
627,840
Total liabilities
3,138,557
3,315,560
Shareholders’ equity:
Capital stock:
Preferred stock, non-voting, no par value (25,000,000 shares authorized, none issued or outstanding)
Class A common stock, voting, no par value (1,260,000 shares authorized, issued and outstanding)
1,260
Class B common stock, non-voting, no par value, $0.24 stated value (200,000,000 shares authorized, 35,128,326 and 35,080,603 issued and outstanding, respectively)
8,364
8,352
Total capital stock
9,624
9,612
Paid-in capital
21,694
19,731
Unvested restricted stock
(780
(1,009
Retained earnings
1,203,184
1,086,965
Accumulated other comprehensive loss
(84,864
(133,448
Total shareholders’ equity
1,148,858
981,851
Total liabilities and shareholders’ equity
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings from joint ventures
(49,659
(44,743
Distributions from joint ventures
55,446
49,892
Depreciation, depletion and amortization
174,531
171,829
Gains on sales of securities
(4,003
Gains on sales of properties and intangibles
(5,361
(4,858
Amortization of debt issuance costs
5,371
2,163
Deferred income taxes
68,707
2,290
Change in operating assets and liabilities (net of assets acquired and liabilities assumed in a business combination accounted for under the purchase method)
(45,693
(120,806
Net cash provided by operating activities
341,918
193,202
Cash flows from investing activities:
Sales and maturities of investments
232,758
Capital expenditures
(159,945
(144,868
Additions to intangible assets
(7,295
Proceeds from sales of properties
15,619
19,760
Acquisition of Coors Brewers Limited, net of cash acquired
(1,587,300
Investment in Molson USA, LLC
(5,239
(2,750
Other
(630
(7,562
Net cash used in investing activities
(150,195
(1,497,257
Cash flows from financing activities:
Issuances of stock under stock-based compensation plans
1,563
11,152
Dividends paid
(22,359
(22,220
Proceeds from issuance of debt
2,406,788
Net (payments) proceeds from short-term borrowings
(45,848
36,890
Net proceeds on commercial paper
249,690
Payments on long-term debt and capital lease obligations
(378,099
(1,116,133
Change in overdraft balances
(25,227
(22,854
(6,127
Net cash (used in) provided by financing activities
(220,280
1,287,496
Cash and cash equivalents:
Net decrease in cash and cash equivalents
(28,557
(16,559
Effect of exchange rate changes on cash and cash equivalents
641
10,170
Balance at beginning of year
77,133
Balance at end of quarter
70,744
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of us includes Adolph Coors Company (ACC), primarily a holding company; its principal operating subsidiaries, Coors Brewing Company (CBC) and Coors Brewers Limited (CBL); and our other corporate entities.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The accompanying financial statements include our accounts and the accounts of our majority-owned domestic and foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. These financial statements should be read in conjunction with the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 29, 2002. The results of operations for the thirty-nine weeks ended September 28, 2003, are not necessarily indicative of the results that may be achieved for the full fiscal year and cannot be used to indicate financial performance for the entire year.
The results of the CBL operations have been included in the consolidated financial statements since February 2, 2002, the date of acquisition.
The year-end condensed balance sheet data was derived from audited financial statements.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to conform to 2003 presentation.
Stock-based compensation
We use the intrinsic value method when accounting for options issued to employees in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (APB No. 25). Accordingly, we do not recognize compensation expense related to employee stock options, since options are always granted at a price equal to the market price on the day of grant. The following table illustrates the effect on net income and earnings per share as if we had applied the fair value provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS No. 123) to stock-based compensation using the Black-Scholes valuation model:
(In thousands, except per share data)
Net income, as reported
Total stock-based compensation expense determined under fair value based method for all option awards, net of related tax effects
(1,586
(3,091
(5,147
(8,887
Proforma net income
59,842
43,528
133,429
132,551
Earnings per share:
Basic – as reported
Basic – proforma
1.65
1.20
3.67
Diluted – as reported
Diluted – proforma
1.64
1.19
3.65
3.63
7
Income taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Judgment is required in determining our worldwide provision for income taxes. Our income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities. We adjust our income tax provision in the period it is probable that actual results will differ from our estimates. Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted. Our effective tax rate for the quarter was 35.85%, down from 37.5% a year ago, as we continued to benefit from the tax impact of our CBL acquisition structure.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN No. 46), which is effective now for all enterprises with interests in variable interest entities created after January 31, 2003. We have no interests in variable interest entities created after January 31, 2003. Pursuant to an October 2003 amendment, FIN No. 46 must be applied to interests in variable interest entities created before February 1, 2003, beginning in the fourth quarter of 2003. We are currently assessing which of our investments may qualify as variable interest entities, and whether we must consolidate those investments as the primary beneficiary. Under the current guidance, a primary beneficiary absorbs the majority of the entity’s expected losses if they occur, receives a majority of the entity’s expected residual returns if they occur, or both. A primary beneficiary relationship requires consolidation treatment. Where it is reasonably possible that the information about our variable interest entity relationships must be disclosed or consolidated, FIN No. 46 requires current disclosure of the nature, purpose, size and activity of the variable interest entity and the maximum exposure to loss as a result of our involvement with the variable interest entity.
No related parties own interests in our equity method investments. Disclosure about our significant joint venture relationships currently accounted for under the equity method of accounting follows:
Equity Method Investees
Total Assets asof September 28,2003
Company share ofjoint venture(loss) income forthe thirty-nineweeks endedSeptember 28,2003
(In thousands)
Container / distribution ventures:
Rocky Mountain Bottle Company, LLC
48,325
6,813
Rocky Mountain Metal Container, LLC
84,153
191
Tradeteam, Ltd.
108,777
6,891
Marketing / selling ventures:
Molson USA, LLC
14,818
(1,903
Grolsch UK Limited
33,045
2,727
Coors Canada
21,378
34,940
On July 29, 2003, we signed a new agreement related to our 50% interest in a joint venture with Owens-Brockway Glass Container, Inc. (Owens) to produce glass bottles at our glass manufacturing facility. Under a related supply agreement, Rocky Mountain Bottle Company (RMBC) has a contract to supply the majority of the Golden Brewery’s bottle requirements. In addition, Owens has a contract to supply the balance of our bottle requirements not met by RMBC in the United States. Our purchases constitute 100% of the output of RMBC. Our share of pre-tax joint venture profits for this investment has been recorded in cost of goods sold. We do not believe there is a significant exposure to loss in our current relationship over our ownership period.
8
Effective January 2002, we became an equal member in a joint venture with Ball Corporation (Ball), with whom we have a can and end supply agreement. Under the agreement, RMMC agreed to supply us with substantially the entire can and end requirements for our Golden Brewery. RMMC manufactures these cans and ends at our existing manufacturing facilities, which RMMC is operating under a use and license agreement. Our purchases constitute 100% of the output of RMMC. Our share of pre-tax joint venture results for this investment has been recorded in cost of goods sold. We do not believe there is a significant exposure to loss in our current relationship over our ownership period.
Tradeteam Ltd.
Tradeteam was formed in 1995 by CBL (then Bass Brewers Limited) and Exel Logistics. CBL has a 49.9% interest in this joint venture. The joint venture operates a system of satellite warehouses and a transportation fleet for deliveries between CBL breweries and customers. Tradeteam also delivers products for other U.K. brewers. We recorded our 2002 share of pre-tax joint venture profits for this investment in cost of goods sold since nearly all activities of Tradeteam were carried out on behalf of CBL. Our 2003 share of pre-tax joint venture profits has been included in other income, since Tradeteam now carries out significant activities on behalf of other major U.K. brewers. We do not believe there is a significant exposure to loss in our current relationship over our ownership period.
In January 2001, we entered into a joint venture partnership agreement with Molson, Inc. (Molson), and paid $65 million for a 49.9% interest in the joint venture. The joint venture, Molson USA, LLC, was formed to import, market, sell and distribute Molson’s brands of beer in the United States. We account for this joint venture by using the equity method of accounting due to the effective control of the partnership being shared equally by the partners under the operating agreement. We recognize our share of the joint venture results in other income, given the immateriality of its results. We believe our maximum exposure to loss over the required ownership period to be $43 million, net of tax, most of which is goodwill representing the excess of our investment over the net assets of the joint venture.
Grolsch U.K., Ltd.
CBL has a 49% interest in a joint venture with Royal Grolsch N.V. The Grolsch joint venture involves the marketing of Grolsch branded beer in the United Kingdom and the Republic of Ireland. The majority of the Grolsch branded beer is manufactured by CBL under a contract brewing arrangement with the joint venture. CBL and Royal Grolsch N.V. sell beer to the joint venture, which sells the beer back to CBL (for onward sale to customers) for a price equal to what it paid, plus a marketing and overhead charge and a profit margin. Our share of pre-tax joint venture profits for this investment has been recorded in cost of goods sold. We do not believe there is a significant exposure to loss in our current relationship over our ownership period.
Coors Canada, Inc.
Coors Canada, Inc. (CCI), a wholly-owned subsidiary, formed a partnership, Coors Canada, with Molson to market and sell our products in Canada. CCI and Molson have a 50.1% and 49.9% interest, respectively. Under the partnership agreement, Coors Canada is responsible for marketing our products in Canada, and it contracts with Molson for brewing, distribution and sales of these brands. In December 2000, the partnership and licensing agreements between Molson and Coors were extended for an indefinite period and included the addition of Molson performance standards for the Coors brand. These agreements also provide for the possibility for Molson to test market and, if the test market is successful, launch light beers in Canada. Coors Canada receives an amount from Molson generally equal to net sales revenue generated from our brands less production, distribution, sales and overhead costs related to these sales. Our share of pre-tax income from this partnership is included in net sales. The partnership’s assets are not significant compared to its level of income since the great majority of its operating activities are contracted to Molson. We do not believe there is a significant exposure to loss in our current relationship over our ownership period.
Implementation of new accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations(SFAS No. 143), which is applicable to financial statements
9
issued for fiscal years beginning after June 15, 2002. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation would be recognized in the period in which the liability is incurred, with an offsetting increase in the carrying amount of the related long-lived asset. Over time, the liability would be accreted to its present value, and the capitalized cost would be depreciated over the useful life of the related asset. Upon settlement of the liability, an entity would either settle the obligation for its recorded amount or incur a gain or loss upon settlement. We adopted this statement effective December 30, 2002, the beginning of our 2003 fiscal year, with no material impact to our financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), which is applicable to contracts entered into or modified after June 30, 2003, and to hedging relationships designated after June 30, 2003. SFAS No. 149 amends Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) for decisions made as part of the Derivatives Implementation Group process, which required amendments to SFAS No. 133 in connection with financial instrument-related FASB projects and in connection with other issues that arose during the implementation phase of SFAS No. 133. The adoption of this statement on June 30, 2003, did not have a material impact on our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which is applicable to financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement requires that certain financial instruments that have previously been classified as equity but that have characteristics of both equity and liabilities, be classified as liabilities. These instruments include, but are not limited to, instruments that embody obligations to purchase or issue shares at the settlement date of an obligation. Our adoption of this statement did not have a material effect on our financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF No. 00-21 is effective for fiscal periods beginning after June 15, 2003. Where multiple elements exist in an arrangement, the arrangement fee is allocated to the different elements based upon verifiable objective evidence of the fair value of the elements. The adoption of EITF No. 00-21 did not have a significant impact on our financial statements.
2. COORS BREWERS LIMITED ACQUISITION
On February 2, 2002, we acquired 100% of the outstanding shares of Bass Holdings Ltd. and certain other intangible assets from Interbrew S.A., for a total purchase price of 1.2 billion British pound sterling (GBP) (approximately $1.7 billion at then-prevailing exchange rates), plus associated fees and expenses. The acquisition supported our key strategic goal of growing our beer business internationally to broaden our geographic platform; diversify revenues, profits and cash flows; and increase our brand portfolio, which we believe will significantly enhance our competitive position in the worldwide beer industry.
One of the factors that contributed to a purchase price that resulted in the recognition of goodwill was the existence of certain financial and operating synergies. In addition to these synergies, there were a number of other factors – including the existence of a strong management team, a proven track record of introducing and marketing successful brands, an efficient sales and distribution system, complementary products and a good sales force.
The business, renamed CBL, includes the majority of the assets that previously made up Bass Brewers, including the Carling®, Worthington’s® and Caffrey’s® beer brands; the U.K. and Republic of Ireland distribution rights to Grolsch® (via and subject to the continuation of a joint venture arrangement, in which CBL has a 49% interest with Royal Grolsch N.V.); several other beer and flavored-alcohol beverage brands; related brewing and malting facilities in the United Kingdom; and a 49.9% interest in the distribution logistics provider, Tradeteam. CBL is the second-largest brewer in the United Kingdom based on total beer volume, and Carling lager is the best-selling beer brand in the United Kingdom. The brand rights for Carling, which is the largest brand we acquired by volume, are mainly for territories in Europe. In addition, CBL wholesales other companies’ beers, wines, liquors, ciders, soft drinks and other products. Since CBL
10
purchases and resells these products, they are included in both net sales and cost of goods sold, but are not included in reported sales volumes.
The following unaudited, pro forma information shows the results of our operations for the thirty-nine weeks ended September 29, 2002, as if the business combination had occurred at the beginning of that fiscal year, as well as comparative actual consolidated results for the thirty-nine weeks ended September 28, 2003, when we owned CBL for the whole period. The 2002 pro forma results are not necessarily indicative of the results of operations that would have occurred if the business combination had occurred at the beginning of that year and are not intended to be indicative of future results of operations.
September 28, 2003
September 29, 2002
(proforma)
2,876,460
Pre tax income
204,505
128,237
Net income per common share:
Basic
3.55
Diluted
3.51
As noted in Footnote 1, the results of CBL operations have been included in the consolidated financial statements since February 2, 2002, the date of acquisition.
3. BUSINESS SEGMENTS
We categorize our operations into three segments: the Americas, Europe and Corporate. These segments are managed and reviewed by separate operating teams, even though the Europe and Americas segments both consist primarily of the manufacture, marketing and sale of beer and other beverage products.
The Americas segment primarily consists of our production, marketing, and sales of the Coors portfolio of brands in the United States and its territories. This segment also includes the Coors Light® business in Canada that is conducted through a partnership investment with Molson and the sale of Molson products in the United States that is conducted through a separate joint venture investment with Molson. The Americas also includes a small amount of volume, partly United States sourced, which is sold outside of the United States and its territories, as well as some contract-produced products from China that are sold in Asia.
The Europe segment consists of our production and sale of the CBL brands, principally in the United Kingdom but also in other parts of the world, our joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and the Republic of Ireland, and our joint venture arrangement for the physical distribution of products throughout Great Britain (Tradeteam).
The Corporate segment currently includes interest and certain other corporate costs that are not attributable to either the Americas or Europe operating segments. In 2003, we began allocating corporate general and administrative expenses to the Corporate segment. Prior year segment amounts have been reclassified to conform to the new presentation. The majority of corporate costs relate to worldwide finance and administrative functions such as legal, human resources, insurance and risk management.
No single customer accounted for more than 10% of our sales or accounts receivable. We have no significant inter-segment revenues.
Summarized financial information concerning our reportable segments is shown in the following tables:
11
Thirty-Nine Weeks Ended
Income Statement Information:
Americas
640,443
624,364
1,859,232
1,845,916
72,607
61,656
189,506
191,346
Europe
408,281
377,234
1,118,009
949,273
46,580
39,190
89,193
98,886
Total
Net sales from operating segments
Income before income taxes from operating segments
119,187
100,846
278,699
290,232
Corporate segment unallocated expenses
(23,432
(26,265
(78,790
(63,960
Total consolidated income before income taxes
As of
Balance Sheet Information:
1,501,445
1,539,973
97,357
94,417
2,785,970
2,757,438
90,845
96,767
Total consolidated assets
Total investments in joint ventures
12
4. GOODWILL AND OTHER INTANGIBLES
The following tables present details of our intangible assets, excluding goodwill, as of September 28, 2003:
Useful Life
Gross
AccumulatedAmortization
Net
(Years)
(In millions)
Intangible assets subject to amortization:
Brands
3-20
88.0
(18.8
69.2
Distribution rights
2-10
33.1
(8.1
25.0
Patents and technology and distribution channels
3-10
30.7
(8.0
22.7
5-34
16.7
(6.8
9.9
Intangible assets not subject to amortization:
Indefinite
332.5
Pension
N/A
42.3
27.6
570.9
(41.7
529.2
Based on average foreign currency exchange rates for the quarter ended September 28, 2003, the estimated future amortization expense of intangible assets is as follows:
Fiscal Year
Amount
2003 (remaining)
5.0
2004
18.0
2005
12.4
2006
11.9
2007
8.1
Amortization expense of intangible assets was $16.5 million and $13.5 million for the thirty-nine weeks ended September 28, 2003 and September 29, 2002, respectively.
Upon the acquisition of CBL on February 2, 2002, we recorded $637 million of goodwill. The total goodwill was determined using the residual method under Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141). This goodwill was allocated between our Europe and Americas segments based on which segment would benefit from certain synergies created by the acquisition. A portion of the acquired goodwill was attributable to operating and financial synergies resulting from the combination. The financial synergy goodwill was calculated by comparing the risk premiums expected by investors associated with the CBC business with and without the CBL acquisition. This synergy was then associated with the segments based on an analysis of the Europe segment with and without the weighted average cost of capital differential as well as the two segments’ relative earnings contributions. Operating cost savings were valued and allocated to the reporting unit where the savings were expected to occur.
13
Application of this methodology resulted in the following allocations:
445
Financial synergies
47
75
122
Operational synergies
30
40
70
Total Goodwill
522
115
637
As of September 28, 2003, goodwill was allocated between our reportable segments as follows:
Segment
Balance atSeptember 28, 2003
122.1
625.0
747.1
Changes in our Europe goodwill balance from February 2, 2002, and from our fiscal year end to September 28, 2003, were the result of GBP foreign currency exchange rate fluctuation.
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), stipulates that we are required to perform goodwill and other intangible asset impairment tests on at least an annual basis and more frequently in certain circumstances. We completed the required impairment testing of goodwill and other intangible assets during the third quarter and determined that no goodwill or other intangible asset is impaired.
In addition, goodwill related to our joint venture investment with Molson was evaluated under Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB No. 18), and found not to be impaired at this time. Since our acquisition of the joint venture interest, the venture has seen significant volume gains, but its operating results have not met our original expectations. We and our partners continue to evaluate and refine the venture’s strategy for 2004 and beyond, and the implications that future assumptions for volume, costs and profit may have on our investment valuation.
5. RESTRUCTURING
During the first nine months of 2003, we incurred charges of $0.6 million related to a reorganization initiative in our Information Technology group. The charge related entirely to employee severance costs and was accounted for under Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities(SFAS No. 146). As of September 28, 2003, 23 employees had been terminated (21 of whom were eligible for termination benefits) and 2 more will be terminated by the end of the year. Payouts under this plan are expected to be substantially complete by the end of 2003.
In 2002, we incurred restructuring charges of approximately $7.0 million related to various initiatives in our Americas operations organization in an effort to consolidate and lower our future overhead costs. The charges consisted primarily of employee severance costs and were accounted for under Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)(EITF No. 94-3), because the charge was initiated prior to our adoption of SFAS No. 146. Since the date of our original accrual, we have incurred further charges related to an expansion of this initiative and have accounted for these additional costs under SFAS No. 146. Payouts on this accrual are expected to be completed by the end of the 2003 fiscal year. As of September 28, 2003, 138 employees had been terminated and an estimated 6 more will be terminated over the course of the year.
14
Our restructuring charges are allocated to cost of goods sold or to marketing, general and administrative expense depending on the nature of the charge. The following table illustrates the changes in the liability balance since December 29, 2002, our last fiscal year end:
Beginning balance at December 29, 2002
6,983
Adjustments
142
Cash payments
(3,346
Balance at March 30, 2003
3,779
68
Additional accruals
970
(3,281
Balance at June 29, 2003
1,536
117
(1,110
Ending balance at September 28, 2003
548
The adjustments made during the first three quarters of 2003 consist primarily of differences between the initial accrual estimate and the actual amount paid out. Additional accruals consist of employee severance charges related to the Information Technology restructure discussed above and to additional terminations resulting from an extension of the brewing operations restructure, as accounted for under SFAS No. 146.
In March 2002, we announced plans to close our Cape Hill brewery and the Alloa malting facility. The majority of production at Cape Hill related to brands that were retained by Interbrew. The production at the Alloa malting facility has been moved to other existing malting facilities. The alternative use value for these sites and the associated estimated exit costs were reflected in the purchase price allocation of CBL at February 2, 2002. The Alloa malting facility was sold in 2002. The Cape Hill brewery, which was closed in the fourth quarter of 2002, is currently being held for sale and has a carrying value at September 28, 2003, of approximately $39.0 million. Our restructuring reserve consists of charges related to employee severance and site closure costs and was accounted for under EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.
15
The following table illustrates the changes in the liability balance since our last fiscal year end (inclusive of foreign currency exchange fluctuations):
Balance at December 29, 2002
9,569
(1,696
(246
Effect of foreign currency translation
(143
7,484
(2,877
(88
307
4,826
(950
(31
3,844
Cash payments consist primarily of severance and other employee benefits related to the closure and will be primarily incurred in 2003. We expect to complete our spending in 2004. Adjustments made during the thirty-nine week period through September 28, 2003, resulted from differences between estimated and actual costs to close the facility. Reductions to the liability balance are credited to goodwill, while increases, if any, are charged to operations currently pursuant to EITF No. 95-3.
6. COMPREHENSIVE INCOME
Other comprehensive income:
Foreign currency translation adjustments
(3,404
7,224
49,993
49,425
Unrealized gain (loss) on derivative instruments, net of tax
(5,111
16,543
(4,592
14,876
Reclassification adjustment on derivative instruments, net of tax
1,234
1,599
3,183
3,801
Comprehensive income
54,147
71,985
187,160
209,540
16
7. EARNINGS PER SHARE (EPS)
Basic and diluted net income per common share were arrived at using the calculations outlined below:
(In thousands, except per share amounts)
Net income available to common shareholders
Weighted average shares for basic EPS
Effect of dilutive securities:
Stock options granted to employees
206
315
198
374
Restricted shares
29
Weighted average shares for diluted EPS
Basic EPS
Diluted EPS
The dilutive effects of stock options were determined by applying the treasury stock method, assuming we were to purchase common shares with the proceeds from stock option exercises. Anti-dilutive securities totaling approximately 3,685,361 shares and 1,469,479 shares in the thirty-nine weeks ended September 28, 2003, and September 29, 2002, respectively, were not included in our calculation because the stock options’ exercise prices were greater than the average market price of the common shares during the periods presented.
8. CONTINGENCIES
We are involved in certain disputes, insurance claims, and legal actions arising in the ordinary course of our business aside from the environmental issues discussed below. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes or legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Environmental
We are one of a number of entities named by the Environmental Protection Agency (EPA) as a potentially responsible party (PRP) at the Lowry Superfund site. This landfill is owned by the City and County of Denver (Denver) and is managed by Waste Management of Colorado, Inc. (Waste Management). In 1990, we recorded a pretax charge of $30 million, a portion of which was put into a trust in 1993 as part of a settlement with Denver and Waste Management regarding the litigation then outstanding. Our settlement was based on an assumed cost of $120 million (in 1992 adjusted dollars). We are obligated to pay a portion of future costs in excess of that amount. We cannot predict the amount of any such change, but an additional accrual of as much as $20 to $30 million is possible.
On an annual basis, Waste Management provides us with cost estimates through 2032. We review these estimates in conjunction with a third party expert and assess our expected liability. Based on the assumptions we were provided, we estimate that the present value and gross amount of the discounted costs were approximately $1 million and $5 million, respectively, as of December 29, 2002, our last fiscal year end and we have made appropriate provision for such costs. No significant changes in this estimate have occurred since December 29, 2002. Accordingly, we believe that the existing accrual is adequate as of September 28, 2003. We did not assume any future recoveries from insurance companies in the estimate of our liability.
In addition, we are aware of groundwater contamination at some of our properties in Colorado resulting from historical, ongoing or nearby activities. There may also be other contamination of which we are currently unaware.
17
From time to time, we have been notified that we are or may be a PRP under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws for the cleanup of other sites where hazardous substances have allegedly been released into the environment. We cannot predict with certainty the total costs of cleanup, our share of the total cost, the extent to which contributions will be available from other parties, the amount of time necessary to complete the cleanups or insurance coverage.
While we cannot predict our eventual aggregate cost for our environmental and related matters in which we are currently involved, we believe that any payments, if required, for these matters would be made over a period of time in amounts that would not be material in any one year to our consolidated operating results, cash flows or our financial or competitive position. We believe adequate reserves have been provided for losses that are probable and estimable.
Disputes
In February 2003, an arbitration panel found in favor of CBC in a contract interpretation issue between CBC and one of its wholesalers. The revenues that were the subject of the arbitration were generated by sales during 2002 and totaled approximately $4.2 million. This revenue was recorded in net sales during the first quarter of 2003.
Regulatory Compliance Review
We are in the process of conducting a regulatory compliance review of certain trading practices. The review has not been concluded. In accordance with SFAS No. 5, Accounting for Contingencies, the company believes, at this time, it is not probable that a liability will arise from the review. While matters of this nature are always subject to uncertainty, any possible liability is not expected to be material.
9. DEBT
Our total borrowings as of September 28, 2003, and December 29, 2002, were composed of the following:
December 29, 2002
6.95% Senior private placement notes
20,000
6 3/8% Senior notes (1)
854,635
855,289
Senior Credit Facility:
USD amortizing term loan
168,000
GBP amortizing term loan
365,689
Commercial paper
299,645
18,447
16,809
Total long-term debt (including current portion)
1,360,727
1,425,787
Less current portion of long-term debt
(85,104
(42,395
Total long-term debt
(1) On May 7, 2002, we issued $850M 6.375% senior notes. There are derivative transactions associated with these notes. $774M principal was exchanged as part of a cross currency swap into GBP with an interest rate of 6.32%. $76M was swapped to floating rates at a spread of 79 basis points over 3 month LIBOR.
In June 2003, we issued approximately $300 million in commercial paper. $250 million of our commercial paper balance is classified as long-term, reflecting our intent and ability to refinance these borrowings on a long-term basis through our revolving line of credit. The remaining $50 million is classified as short term, as our intent is to repay that portion in the next twelve months. As of September 28, 2003, the interest rates on our commercial paper borrowings ranged from 1.21% to 1.24%, with a weighted average of 1.23%.
18
In May 2003, we increased our unsecured committed credit arrangement from $300 million to $500 million in order to support our commercial paper program. As of September 28, 2003, $300 million of the total $500 million line of credit was being used as a backstop for our commercial paper program while the remainder was available for general corporate purposes. As of September 28, 2003, all of our line of credit, except the portion backing commercial paper, was available to us. This line of credit has a five-year term expiring 2007.
Simultaneous with our issuance of commercial paper, we made a payment against the then-outstanding principal and interest on our GBP-denominated amortizing term loan of approximately 181.1 million GBP ($300.3 million at then-prevailing foreign currency exchange rates) using proceeds from our issuance of commercial paper. In addition, we accelerated the amortization of loan fees related to our GBP-denominated amortizing term loan on the date of the payment and expensed approximately $2.4 million as interest expense. In July and August 2003, we made final payments of approximately 40.5 million GBP ($65.7 million at then-prevailing foreign currency exchange rates) using cash from operations. We again accelerated the amortization of loan fees related to our GBP-denominated amortizing term loan on the date of payment, expensing an additional $0.7 million as interest expense during the third quarter. As of August 11, 2003, we had fully repaid the balance of our GBP-denominated term facility.
10. SUBSEQUENT EVENT
On October 3, 2003, at a special meeting of our shareholders, Class A and Class B shareholders voted to approve a proposal that resulted in a change of our place of incorporation from Colorado to Delaware. The change will be beneficial to us, due to Delaware’s comprehensive, widely used and extensively interpreted corporate law. The re-incorporation did not result in any change in our name, headquarters, business, jobs, management, location of offices or facilities, number of employees, taxes payable to the State of Colorado, assets, liabilities, or net worth. However, the par value of all our classes of stock will be $0.01 per share, effective in the fourth quarter of 2003.
11. SUPPLEMENTAL GUARANTOR INFORMATION
On May 7, 2002, our wholly owned subsidiary, CBC (Issuer) completed a private placement of $850 million principal amount of 6 3/8% senior notes due 2012. The notes were issued with registration rights and were guaranteed on a senior and unsecured basis by Adolph Coors Company (Parent Guarantor) and certain domestic subsidiaries (Subsidiary Guarantors). The guarantees are full and unconditional and joint and several. A significant amount of the Issuer’s income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer’s debt service obligations are provided in large part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as our financial condition and operating requirements and those of certain domestic subsidiaries, could limit the Issuer’s ability to obtain cash for the purpose of meeting its debt service obligation including the payment of principal and interest on the notes.
Simultaneously with the private placement, we entered into a registration rights agreement pursuant to which we registered the exchange of the notes for substantially identical notes. The exchange of all the notes was completed on September 16, 2002.
The following information sets forth our Condensed Consolidating Balance Sheets as of September 28, 2003, and December 29, 2002, and the Condensed Consolidating Statements of Income for the thirteen and thirty-nine weeks ended September 28, 2003, and September 29, 2002, and the Condensed Consolidating Statements of Cash Flows for the thirty-nine weeks ended September 28, 2003, and September 29, 2002. Investments in our subsidiaries are accounted for under the equity method; accordingly, entries necessary to consolidate the Parent Guarantor, Issuer, and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Issuer and the Subsidiary Guarantors would not provide additional material information that would be useful in assessing their financial composition.
19
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003
(In thousands, unaudited)
ParentGuarantor
Issuer ofNotes
SubsidiaryGuarantors
SubsidiaryNonGuarantors
Eliminations
Consolidated
Sales
658,200
37,629
724,362
(105,912
(526
(265,029
552,288
37,103
459,333
Cost of goods sold
(336,779
(30,077
(291,160
Equity in subsidiary earnings
54,345
67,181
(121,526
282,690
7,026
168,173
(125
(171,515
(4,688
(104,985
54,220
111,175
2,338
63,188
323
4,360
Interest income (expense)
11,221
(15,413
4,135
(18,324
Other (expense) income
(35
(49,329
74,785
(25,422
65,729
46,462
81,288
23,802
Income tax (expense) benefit
(4,301
7,828
(30,713
(7,141
54,290
50,575
16,661
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 29, 2002
652,591
36,327
633,804
(106,104
(669
(214,351
546,487
35,658
419,453
(338,148
(27,514
(270,432
40,863
20,989
(61,852
229,328
8,144
149,021
(81
(174,562
(6,636
(95,080
40,782
54,766
1,508
53,941
1,115
4,574
9,754
(14,066
192
(17,685
Other income (expense)
12,600
8,451
(19,499
50,536
54,415
10,151
21,331
(3,917
(13,535
(4,111
(6,399
40,880
6,040
14,932
20
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003
Issuer of Notes
1,933,947
87,129
1,969,341
(306,264
(965
(705,947
1,627,683
86,164
1,263,394
(1,008,494
(69,097
(822,986
114,985
101,003
(215,988
720,192
17,067
440,408
(366
(517,402
(18,779
(298,888
Operating income (loss)
114,619
202,790
(1,712
141,520
689
91
13,795
33,948
(45,696
4,561
(55,028
(42,154
114,490
(65,920
149,131
114,969
117,430
34,367
(10,555
(204
(40,263
(10,311
114,765
77,167
24,056
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2002
1,932,916
86,773
1,610,314
(307,828
(1,661
(525,325
1,625,088
85,112
1,084,989
(1,009,835
(64,072
(684,551
120,647
69,560
(190,207
684,813
21,040
400,438
(504,668
(19,474
(253,696
Special charges
120,401
178,343
1,566
146,742
786
1,601
13,910
28,475
(39,741
4,301
(43,813
6,142
16,198
31,510
(49,942
3,908
155,804
156,401
37,377
66,897
(14,366
(35,203
(15,196
(20,069
121,198
22,181
46,828
21
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 28, 2003
274
1,181
1,164
28,632
72
101,054
11,184
464,864
6,081
48,986
3,013
54,264
Inventories, net
111,303
7,601
77,620
11,056
(307
377
34,581
612
84,746
6,427
308,161
23,267
710,503
813,582
18,928
558,109
115,978
(138,344
769,438
69,483
79,384
380,310
Net investment in and advances to subs
1,142,593
1,814,845
(2,957,438
16,349
(21,411
142,609
46,496
5,178
73,150
4,648
116,968
1,170,547
3,271,145
130,492
2,672,669
Liabilities and shareholder’s equity
160,622
3,850
151,025
51,849
1,042
4,606
29,693
573
138,331
(5,525
115,694
3,248
269,868
6,401
3,113
449,363
8,713
566,943
1,237,175
18,448
7,214
443,028
844
211,442
21,689
2,129,566
9,557
977,745
1,141,579
120,935
1,694,924
22
AS OF DECEMBER 29, 2002
161
499
634
57,873
99,560
9,974
511,512
30,078
1,031
53,271
101,147
4,217
79,307
397
20,108
471
41,301
42,355
558
292,693
15,856
744,789
844,206
24,645
511,388
116,101
(130,652
741,620
70,363
83,990
374,723
1,068,297
1,739,421
(2,807,718
2,968
(14,545
158,187
59,790
4,761
83,787
3,488
117,511
1,076,584
3,226,443
155,514
2,646,588
167,037
2,869
164,741
57,642
1,151
20,208
29,907
694
147,443
67,944
62,655
63,009
218,542
22,100
79,554
381,736
67,723
630,488
1,363,392
6,789
413,673
28
207,350
94,733
2,158,801
67,751
994,275
1,067,642
87,763
1,652,313
23
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Subsidiary NonGuarantors
18,041
135,736
95,749
92,392
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures
(60,719
(892
(98,334
10,177
5,135
Net cash (used in) provided byinvesting activities
(66,281
9,285
(93,199
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of stock under stock plans
Net proceeds (payments) from short-term borrowings
34,167
(80,015
Payments on debt and capital lease obligation
Net activity in investment and advances (to) from subsidiaries
2,868
50,696
(104,727
51,163
Net cash used in financing activities
(17,928
(68,773
(28,852
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents
113
682
(29,659
223
418
24
16,282
93,125
25,875
57,920
(97,136
(4,405
(43,327
4,535
1,545
13,680
(115,105
(92,650
(1,379,545
Net cash provided by (used in)investing activities
(225,313
(95,510
(1,409,192
Issuance of stock under stock plans
Proceeds (payments) from Issuance of debt
2,400,935
5,853
Payments on debt and capital lease obligations
(85,000
(994,243
(1,079,243
(211,352
(1,248,614
73,391
1,386,575
(185
(5,942
Net cash (used in) provided byfinancing activities
(307,605
129,282
1,392,428
Net (decrease) increase in cash and cash equivalents
(58,565
(2,906
3,756
41,156
(1,459
11,629
58,565
4,790
724
13,054
1,884
3,021
65,839
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Since our founding in 1873, we have been committed to producing the highest-quality beers. Our portfolio of brands is designed to appeal to a wide range of consumer tastes, styles and price preferences. Our beverages are sold predominately throughout the United States (U.S.), the United Kingdom (U.K.) and in other markets around the world. We are the third-largest producer of beer in the United States, based on volume and revenues. We are the United Kingdom’s second-largest beer company and the ninth-largest brewer in the world, based on volume.
The following key company goals are directed toward succeeding in the worldwide beer business:
• consistent volume growth, especially in our premium brands;
• product pricing that reflects a brand-building approach to the beer business;
• continued efforts to reduce costs in our brewing and shipping operations;
• continued investment in our brands through advertising and other selling and marketing investments, resulting in volume growth and improved pricing;
• strong cash flow and pay-down of debt, resulting in lower interest expense and higher returns on capital; and
• consistent growth in overall sales, profitability and returns on capital.
The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity for the thirteen and thirty-nine weeks ended September 28, 2003. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in our Form 10-K for the fiscal year ended December 29, 2002.
CONSOLIDATED RESULTS OF OPERATIONS
Our consolidated results are driven by the results of our three business segments: Americas, Europe and Corporate.
Our third quarter 2003 consolidated results reflect an increase of 28.4% in income before income taxes and a 31.8% increase in income after taxes when compared with the same period in the prior year. Contributing to this increase was a 4.8% increase in quarterly volume from 8.4 million barrels to 8.8 million barrels, primarily driven by year-over-year volume increases in our Europe segment. In addition, our income before income taxes was affected positively by more favorable margins in both the Americas and Europe segments, as well as benefits received from certain cost-saving initiatives throughout our business. We also realized the benefit of a 4% year-over-year appreciation of the British pound (GBP) against the U.S. dollar in our Europe segment. Factors offsetting these positive contributions to income before income taxes include continuing economic softness and poor sales mix and volume trends in the United States, the loss of contract brewing and transitional service agreements in our Europe segment and increased pension and health care expenses throughout the business.
Our effective tax rate for the quarter was 35.85%, down from 37.5% a year ago, as we continued to benefit from the tax impact of our CBL acquisition structure.
Year-to-date consolidated income before taxes decreased 11.7% year-over-year. Our consolidated volume increased 4.2% from 23.8 million barrels to 24.8 million barrels when compared to the same period in the prior year. Poor sales mix trends away from higher-margin products, particularly in the first half of the year, partially offset improvements in cost of goods sold made through the implementation of cost-saving initiatives in our Americas business. Nevertheless, our gross profit increased 3.9% compared to the first three quarters of last year. Marketing, general and administrative expenses increased 7.4%, or $57.4 million, year-to-date compared to last year due to increased spending on sales and marketing efforts, the loss of reimbursements from transitional service arrangements in Europe (the majority of which
26
ended on or around the end of 2002), the increase in the value of the GBP, and higher pension and health care benefits in both the Americas and Europe segments.
Our year-to-date effective tax rate was 30.7%, down from 37.5% in the comparable period the prior year. The decrease was driven by the favorable completion of tax audits for the years 1996 through 2000, which resulted in a 7.0% reduction in our second quarter rate, and an approximate 2.8% reduction in our expected full year rate. The lower tax rate year-to-date partially offset the factors discussed above, netting to a 2.0% decrease in net income for the first three quarters of 2003 versus the same period of 2002.
THE AMERICAS SEGMENT RESULTS OF OPERATIONS
The Americas segment primarily consists of our production, marketing, and sales of the Coors portfolio of brands in the United States and its territories. This segment also includes the Coors Light® business in Canada that is conducted through a partnership investment with Molson, Inc. (Molson) and the sale of Molson products in the United States that is conducted through a separate joint venture investment with Molson. The Americas also includes a small amount of volume, partly United States sourced, which is sold outside of the United States and its territories, as well as some contract-produced products from China that are sold in Asia.
PercentChange
(In thousands, except percentages)
Volume in barrels
5,960
5,956
N/M
17,284
17,457
1.0
%
2.6
0.7
(384,356
(380,950
0.9
(1,123,458
(1,124,755
0.1
256,087
243,414
5.2
735,774
721,161
2.0
(182,920
(183,773
0.5
(549,165
(532,663
3.1
Special credits
840
73,167
59,641
186,609
189,338
1.4
Other income (expense), net
(560
2,015
2,897
2,008
44.3
17.8
30,824
35,771
9.5
93,295
98,706
5.5
18,263
44,909
59.3
61,727
108,868
43.3
N/M = Not Meaningful
Net sales and volume
Third quarter net sales for the Americas segment increased 2.6% compared to the same period in the prior year, driven primarily by continued favorable pricing in the United States. In addition, we increased our income from our business in Canada by 36.6% due to increased Coors Light volume, modestly higher beer prices and a strong Canadian dollar during the quarter. Furthermore, year-over-year third quarter results were favorably impacted by the lapping of the implementation of the Puerto Rico excise tax increase, which drove an increase in wholesale and retail inventories in the second quarter of 2002 in anticipation of excise tax increases, thereby causing lower sales in the third quarter of 2002. These drivers of an increase in net sales were partially offset by a continued mix shift in the United States toward lower revenue-per-barrel brands and packages.
27
Volume of approximately 6.0 million barrels for the third quarter was up slightly in comparison to the third quarter of 2002 as poor weather and economic softness across much of the United States continued to provide challenges in the category for most of the third quarter in 2003. Americas distributor sales to retail declined 0.3% in the third quarter, reflecting persistent sales weakness in the U.S. beer industry this year. Americas volume to wholesalers increased slightly, as our wholesalers started and ended the third quarter with their inventories about 100,000 barrels above last year. Increased distributor inventories at the beginning of the quarter were driven by wholesaler anticipation of a strong July 4th holiday, while the higher inventories at the end of the quarter were to help us bridge the cutover to new supply-chain systems and processes (See Outlook for Remainder of 2003).
Year-to-date net sales increased 0.7% over the same period last year, but volume decreased 1.0% from 17.5 million barrels to 17.3 million barrels. Net sales were impacted positively by continued favorable pricing in the United States and previously discussed growth in our Canada business. In addition, net sales were impacted positively by a one-time $4.2 million increase in revenue during the first quarter that resulted from the settlement of a contract interpretation issue between CBC and one of its wholesalers.
Cost of goods sold and Gross profit
Americas cost of goods sold for the third quarter increased 0.9%, 0.8% on a per-barrel basis, compared to the same period last year. Our operations costs, which make up about 95% of cost of goods sold, declined approximately 1.6% per barrel in the third quarter as a result of lower packaging costs and operations efficiency initiatives, higher distributor and utility costs. Overall cost of goods sold increased, however, due to higher pension and health care costs, along with the mix impact of higher sales of import brands by our company-owned distributorships.
Gross profit for the third quarter increased 5.2% as net sales per barrel growth, largely driven by higher prices, more than offset increases in cost of goods sold during the quarter.
Year-to-date cost of goods sold decreased slightly from the same period in 2002, due in part to lower packaging costs and cost-saving initiatives, including reduced headcount and labor efficiencies. On a per barrel basis, cost of goods sold increased 0.9% from the same period prior year due to the same factors contributing to the third quarter increase. Additionally, lower year-to-date volume contributed to less leveraging of fixed costs during the first three quarters of the year.
Gross profit increased 2.0% year-to-date compared with the same period in the prior year for the reasons stated above.
Marketing, general and administrative expenses in the Americas decreased 0.5% during third quarter. The decrease is attributable to the quarterly distribution of selling and marketing expense last year, based on sales volume, which put approximately 75% of the full-year increase in spending into the third quarter in 2002. Overhead expenses increased due to higher spending on pension, health care and information systems.
Year-to-date marketing, general and administrative expenses increased 3.1% as a result of higher sales and marketing investments and increased spending on information systems and pension and health care costs.
We recorded no special items in the first three quarters of 2003, nor did we record any special items in the third quarter of 2002. We did record a net special credit of $0.8 million in the first nine months of 2002 comprised of expenses related to the dissolution of our former can and end joint venture, offset by a cash payment on a debt from our former partner in a brewing business in South Korea.
Operating income increased 22.7% during the third quarter 2003 compared to the third quarter of 2002, while year-to-date operating income declined slightly over the same period in 2002 as a result of the third quarter and year-to-date factors discussed above.
Third quarter other expenses were composed primarily of losses on our Molson USA joint venture partnership. Year-to-date other income included royalties and a $3.1 million gain on the sale of a distributorship warehouse, partially offset by year-to-date losses on our Molson USA joint venture partnership.
THE EUROPE SEGMENT RESULTS OF OPERATIONS
The Europe segment consists of our production and sale of the CBL brands, principally in the United Kingdom but also in other parts of the world, our joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and Republic of Ireland, and our joint venture arrangement for the physical distribution of products throughout Great Britain (Tradeteam). It also includes the sale of Coors Light in the United Kingdom and Republic of Ireland.
2,812
2,451
14.7
7,538
6,337
19.0
Net sales (1)
8.2
Cost of goods sold (1)
(273,660
(255,144
7.3
(777,119
(633,703
22.6
134,621
122,090
10.3
340,890
315,570
8.0
(92,149
(87,036
5.9
(267,566
(229,012
16.8
42,472
35,054
21.1
73,324
86,558
15.3
4,207
12,960
12,005
(99
(438
77.4
2,909
18.9
9.8
Depreciation and amortization
27,120
28,473
10.1
81,236
73,123
11.1
33,845
2,751
98,218
43,295
(1) Third quarter and year-to-date 2003 net sales and cost of goods sold are $7.8 million higher than reported in the press release announcing our third quarter results due to an excise tax reclassification made by the CBL subsidiary subsequent to our press release.
All of the reported results for the third quarter for our Europe segment increased due to an approximate 4% year-over-year appreciation of the GBP against the U.S. dollar. Year-to-date, the appreciation of the GBP against the U.S. dollar was 8.5%. Additionally, Europe’s year-to-date results were impacted because we owned the business for 39 weeks in 2003 vs. 34 weeks in 2002, the five additional weeks reflecting soft post-holiday volumes.
Net sales for our Europe segment for the third quarter 2003 increased $31.0 million, and volume increased 14.7% from 2.5 million barrels to 2.8 million barrels. From a brand perspective, this growth was driven by the Carling and Grolsch brands, both of which grew more than 20% in the quarter. These volume increases were attributable to growth in both the on- and off-trade. Our on-trade business, which represents approximately two-thirds of our Europe volume and an even greater portion of margin, continued to grow market share, pricing and margins in the third quarter due to strong sales execution and unusually hot weather in the United Kingdom this summer. We focused our sales efforts this quarter toward on-premise sales of Carling in existing accounts, along with new distribution in low-share markets, including Scotland. Sales of factored brands in the on-trade declined at a double-digit rate in the third quarter, partially offsetting increases in the on- and off-trade. This trend was primarily driven by some of our large on-trade chain customers changing to purchase non-Coors products directly from the brand owners and distribute them via non-Coors distribution systems. Our off-trade business accelerated volume and share gains in the third quarter from already robust trends earlier in the year. In the third quarter, we grew off-trade volume more than 30%, led by Carling and Grolsch. Our off-trade volume performance was impacted by several factors, including 2003 weather and very weak volume last July as retailers worked off excess packaged beer inventories following the World Cup.
Net sales year-to-date increased $168.7 million, while year-to-date volume increased 1.2 million barrels from 6.3 million barrels to 7.5 million barrels. The significant increase in net sales and volume was due primarily to our owning the business for thirty-four weeks in 2002 versus thirty-nine weeks in 2003, coupled with the factors noted above. Market share year-to-date increased by more than 1.5% due to the growth in the Carling and Grolsch brands. Our on-trade market share increased approximately 1.5% year-to-date on the strength of the Carling brand, the continued rollout of Carling Extra Cold, and a more focused sales effort. We have increased our off-trade market share by more than 2.2% year-to-date. Partially offsetting these positive factors year-to-date was the decline in our on-trade factored brand sales and heavy price discounting and mix shift toward lower revenue-per-barrel sales in our off-trade business.
Cost of goods sold for the third quarter increased $18.5 million, but on a per-barrel basis, cost of goods sold decreased 6.5%. The aggregate increase in cost of goods sold was driven by increased volume and exchange rates. Costs of goods sold per barrel decreased as sales of factored brands declined and the benefits of right-sizing our business were realized. Additionally, with our increased volume, our ability to leverage fixed costs increased. These positive factors were partially offset by the loss of income from contract brewing arrangements that substantially ceased near the end of 2002, the reclassification of our share of profits from the Tradeteam joint venture from cost of goods sold to other income beginning in 2003, and the high cost of contracting with other brewers to package some of our volume. Our newly configured packaging lines at our Burton brewery were not fully operational until late in the quarter. As a result, some of our incremental off-trade packaging was contracted out to small regional brewers for the first three quarters of the year.
Our gross profit for the third quarter increased $12.5 million, or 10.3%, because of the factors described above.
Year-to-date cost of goods sold increased $143.4 million and, on a per-barrel basis, increased 3.1%. The increases were due to the factors noted above, coupled with our owning the business for the entire period this year versus only a partial period in 2002.
Gross profit year-to-date increased 8.0% as a result of the factors noted above.
Marketing, general and administrative expenses increased $5.1 million in the third quarter of 2003 versus the same period in 2002 primarily due to exchange rates and higher investments in sales staff and increased depreciation charges from investments in information systems and dispense equipment, the latter supporting the sales growth in the on-trade. These increases were partially offset by the one-time gain of $3.5 million pretax on the sale of the rights to our Hooper’s Hooch flavored alcohol beverage brand in Russia.
In addition to these factors, marketing, general and administrative expenses were impacted by the loss of reimbursements from the transitional services arrangements with Interbrew S.A. that were set up following the CBL acquisition in February 2002 and largely concluded by the end of that year. These reimbursements were recorded as a reduction to marketing, general and administrative expenses in 2002.
The factors noted above contributed to the year-to-date increase of $38.6 million, or 16.8%, in year-to-date marketing, general and administrative expenses versus the same period the prior year.
Consequently, operating income increased $7.4 million, or 21.1%, in the third quarter. Year-to-date operating income decreased $13.2 million, or 15.3%, because of the net effect of the factors above.
Interest income in the third quarter decreased $0.4 million due to lower customer trade loan balances. Year-to-date interest income increased $1.0 million due to the inclusion of an additional five weeks of results in 2003.
Third quarter 2003 other expense, net was composed primarily of Tradeteam income, which was recorded in cost of goods sold in 2002. Year-to-date other income, net was composed primarily of Tradeteam income and gains on sales of assets, partially offset by leasehold expenses.
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THE CORPORATE SEGMENT RESULTS OF OPERATIONS
The Corporate segment currently includes interest and certain other general and administrative costs that are not attributable to either the Americas or Europe operating segments. The Corporate segment has no sales or cost of goods sold. In 2003, we began allocating certain general and administrative expenses to the Corporate segment. Prior year segment amounts have been reclassified to conform to the new presentation. The majority of these corporate costs relate to worldwide finance and administrative functions, such as legal, human resources, insurance and risk management.
(6,244
(5,550
12.5
(18,704
(16,409
14.0
(2,642
Operating loss
(19,051
1.8
536
51.9
1,645
4,292
61.7
(18,382
15.7
(62,216
22.5
658
(25
485
1,577
Loss before income taxes
10.8
23.2
Marketing, general and administrative expenses for the Corporate segment increased 12.5% in the third quarter compared to the same period the prior year due to increased pension and health care costs and management of a larger global business. Year-to-date marketing, general and administrative expenses increased for the same reasons.
We recorded no special items during the third quarter and year-to-date 2003, nor did we record any special items in third quarter of 2002. Year-to-date, we recorded special charges in 2002 primarily related to acquisition costs for CBL, including accounting, appraisal and legal fees not eligible for capitalization.
Interest income for the third quarter and year-to-date 2003 decreased $0.6 million and $2.6 million, respectively, because of lower interest rates and lower cash balances in the current year.
Interest expense in the third quarter decreased $3.4 million versus the prior year. The reduction in interest expense was due primarily to the dollar-denominated commercial paper program that started in June of this year, the initial proceeds of which we used to pay down approximately $300 million of higher-rate GBP-denominated term debt. Our new debt structure has lowered interest costs on outstanding balances. Debt outstanding was also lower this year as we have used available cash flow to reduce debt by approximately $170 million in the nine months ended September 28, 2003.
Year-to-date, interest expense increased $11.4 million. While our commercial paper program has reduced our interest expense since its implementation in June 2003, these savings were more than offset year-to-date as a result of the existence of our debt structure for the acquisition of CBL for the first thirty-nine weeks of 2003 versus only nineteen
32
weeks in 2002 and the currency appreciation on our GBP-denominated term debt prior to the August payoff. Prior to finalizing the long-term structure in second quarter of 2002, we had exclusively short-term borrowings at lower interest rates.
In the third quarter and year-to-date 2003, other income consisted primarily of foreign currency exchange gains recognized during the period, offset slightly by bank fees. In 2002, year-to-date other income consisted of gains on sales of investments, offset by foreign currency exchange losses recognized during the period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity are cash provided by operating activities and external borrowings. As of September 28, 2003, we had working capital of $28.9 million compared to negative working capital of ($94.0 million) at December 29, 2002. Our cash balance declined $27.9 million compared to December 29, 2002, due to timing of cash receipts, seasonality of the business, and timing of debt payments. The increase in our working capital is the net result of changes in current debt, accrued income taxes, accrued expenses and other liabilities, and accrued salaries and vacations.
We believe that cash flows from operations and cash provided by short-term borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments and anticipated capital expenditures. However, liquidity could be impacted negatively by a decrease in demand for our products, which could arise from competitive circumstances or any of the other factors we describe in the section entitled “Risk Factors.” Likewise, we also have credit facilities that contain financial and operating covenants and provide for scheduled repayments, which could impact our liquidity on an ongoing basis.
Operating activities
Net cash provided by operating activities for the thirty-nine week period ending September 28, 2003, increased $148.7 million from last year. The change was attributable primarily to more favorable changes in operating assets and liabilities than experienced in 2002, driven by higher collections of accounts receivable, and changes in deferred income taxes resulting from tax refunds and the completion of tax audits for the years 1996 through 2000, partially offset by a decrease in net income and an increase in current-year pension funding compared to last year.
Investing activities
During the thirty-nine weeks ended September 28, 2003, net cash used in investing activities decreased $1.3 billion from the same period last year. This decline was due primarily to a prior year payment, net of cash acquired, of $1.6 billion made to purchase CBL, partially offset by sales and maturities of securities in 2002. Excluding the effects of the CBL purchase and the sale of securities, the current year net cash used in investing activities increased by $7.5 million due to an increase in capital expenditures and an increased cash investment of $2.5 million in our Molson USA, LLC joint venture.
33
Financing activities
Net cash used in financing activities in 2003 changed by $1.5 billion from the same period last year. The change was due mainly to the issuance of debt in 2002 to fund our acquisition of CBL. Debt obligations incurred initially upon the acquisition of CBL were refinanced during the second quarter of 2002. Proceeds from issuance of debt, as well as payments on long-term debt and capital lease obligations during the nine months ended September 29, 2002, were grossed up by $850 million as a result of the refinancing. During the nine months ended September 28, 2003, we applied approximately $170 million toward debt repayments.
Debt Structure
The aggregate principal long-term debt maturities of total debt for the next five fiscal years and thereafter are as follows:
Twelve months commencingin the fourth quarter of:
2003
44,614
106,725
18,586
249,346
Thereafter
856,352
While we made significant changes to our capital structure in 2002, incurring debt to finance the purchase of CBL, we have made refinements during 2003 that have enhanced our debt position and contributed to a decrease in interest expense when compared to the third quarter of 2002. Our current intent is to use cash from operating activities, net of capital expenditures and other cash used in investing activities, to reduce our debt obligations.
In June 2003, we issued approximately $300 million of commercial paper. $250 million of our commercial paper balance is classified as long-term, reflecting our intent and ability to refinance these borrowings on a long-term basis through our revolving line of credit. The remaining $50 million is classified as short term, as our intent is to repay that
34
portion during the next twelve months. As of September 28, 2003, the interest rates on our commercial paper borrowings ranged from 1.21% to 1.24%, with a weighted average of 1.23%.
In May 2003, we increased our unsecured committed credit arrangement from $300 million to $500 million in order to support our commercial paper program. As of September 28, 2003, $300 million of the total $500 million line of credit was being used as a backstop for our commercial paper program while the remainder was available for general corporate purposes. As of September 28, 2003, all of our line of credit, except that backing commercial paper, was available to us. This line of credit has a five-year term expiring 2007.
Additionally, we made a payment in the third quarter of 2003 against the then-outstanding principal and interest on our GBP-denominated amortizing term loan of approximately 181.1 million GBP ($300.3 million at then-prevailing foreign currency exchange rates) using proceeds from our issuance of commercial paper. In addition, we accelerated the amortization on loan fees related to our GBP-denominated amortizing term loan on the date of the payment and expensed approximately $2.4 million. In July and August 2003, we made final payments of approximately 40.5 million GBP ($65.7 million at then-prevailing foreign currency exchange rates) using cash from operations. We again accelerated the amortization on loan fees related to our GBP-denominated amortizing term loan on the date of payment, expensing an additional $0.7 million during the third quarter. As of August 11, 2003, we had fully repaid the balance of our GBP-denominated term facility.
At September 28, 2003, CBC had two USD uncommitted lines of credit totaling $50.0 million in aggregate. The lines of credit are with two different lenders. We had $6.4 million outstanding under these lines of credit as of September 28, 2003. Amounts outstanding under the lines of credit bear interest at a rate stipulated by the lender at the time of borrowing.
In addition, CBL had two 10 million GBP uncommitted lines of credit and a 10 million GBP overdraft facility. No amount had been drawn on the overdraft facility as of September 28, 2003. The lines of credit had no outstanding values at September 28, 2003. These lines of credit bear interest at a floating rate determined by the lender.
Some of our debt instruments require us to meet certain customary covenant restrictions, including financial tests and other limitations. As of September 28, 2003, we were in compliance with all of these covenants.
35
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual cash obligations as of September 28, 2003:
Payments Due By Period
Less than 1year
1 – 3 years
4 –5 years
After 5 years
Long term debt, including current maturities
151,339
267,932
Capital lease obligations
1,483
1,386
97
Operating leases
73,554
19,938
33,559
17,882
2,175
Other long-term obligations(1)(2)
5,045,208
715,557
1,314,896
2,416,332
598,423
Total obligations
6,480,972
821,985
1,499,891
2,702,146
1,456,950
Other commercial commitments:
Amount of Commitment Expiration Per Period
TotalAmountsCommitted
Standby letters of credit
2,906
Guarantees
Total commercial commitments
6,019
(1) These amounts consist largely of long-term supply contracts with our joint ventures and unaffiliated third parties to purchase material used in production and packaging, such as cans and bottles, in addition to various long-term commitments for advertising, promotions and information technology services. On July 29, 2003, we signed a new agreement, effective August 1, 2003, with Owens-Brockway Glass Container, Inc. relating to the operation of our joint venture and the production of glass bottles, as well as the supply of glass bottles for our non-Golden commercial business. The new agreement has a term of 12 years, and is reflected in the table above, whereas the previous agreement extended to 2005.
(2) Included in Other long-term obligations is the effect of our most recent completed contract with Graphic Packaging International Corporation (GPIC), dated March 25, 2003. See Item 13(b) Certain Business Relationships, in our Form 10-K dated December 29, 2002, for further information.
PENSION PLANS
We maintain defined benefit pension plans for eligible employees in both the United States and the United Kingdom. We expect our full-year 2003 consolidated pension expense to be approximately $38.8 million versus $18.6 million a year ago. Our expected increase in consolidated pension expense is due to, among other factors, the combined impacts of reducing our U.S. pension investment return assumption for 2003 to 9.0% from 9.5% in 2002 and increased actuarial loss amortization versus a year ago. While we are not required to make any mandatory contributions to either of our pension plans, we have made consolidated contributions, voluntarily, of approximately $3.8 million per month throughout 2003. Final calculations of ongoing contribution levels will not be made until December 28, 2003.
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OUTLOOK FOR THE REMAINDER OF 2003
Our third quarter results continue to reflect trends seen since the beginning of the fiscal year. Our Americas business continues to face a challenging volume environment in the United States but has made meaningful progress in reducing costs and improving sales mix. Our outlook for the last quarter of the year includes a continuing positive U.S. pricing environment and slight improvement in sales mix – contributing to improved revenue per barrel – as well as anticipation of declining distributor inventories, higher distribution costs and continued investment on the front end of our business.
In the fourth quarter, we expect to face many of the same challenges that we faced during the third quarter in the United States. In addition, we expect that our fourth quarter costs and earnings will be impacted by the new supply-chain systems and processes implemented on the first day of the fourth quarter. This has created difficulties in our order fulfillment processes. We incurred additional costs subsequent to the system cutover, primarily in higher freight costs of an estimated $3 million. While building distributor inventories at the end of third quarter 100,000 barrels above last year helped to limit the sales impact of this changeover, we are still facing challenges, including stockouts and unusually low inventory levels of some products throughout our U.S. business. We are not able at this time to predict what impact these shortages will have on our volume trends in the fourth quarter, but we expect that distributor inventories will be roughly in line with year-end 2002 by the end of the fourth quarter. Because our distributors ended the third quarter with higher-than-normal inventories in preparation for new systems implementation, the inventory reduction during the balance of the year may impact volume, cost and profit trends negatively in the fourth quarter, aggravated by the fact that the fourth quarter is typically a smaller volume quarter.
Fourth quarter cost of goods sold per barrel will be affected by many of the same factors as third quarter, including higher fuel, freight, pension and health care costs, along with higher sales of import brands by our company-owned distributorships, partially offset by operating efficiencies and continued cost reduction initiatives. We anticipate that fourth quarter cost of goods sold also will be impacted by higher costs associated with previously noted systems implementation. In addition, we expect fourth quarter fuel and utility costs to remain higher than last year.
We anticipate that Americas marketing, general and administrative costs for the full year will increase at a mid-single-digit percentage rate, consistent with our trends in recent years and in the first three quarters of this year.
Since our acquisition of the Molson USA joint venture interest, the venture has seen significant volume gains, but its operating results have not met our original expectations. We and our partners continue to evaluate and refine the venture’s strategy for 2004 and beyond, and the implications that future assumptions for volume, costs and profit may have on our investment valuation.
Our outlook for this portion of our business remains positive for the fourth quarter as we expect continued growth in both the on- and off-trade and continued benefits from our efforts to right-size our business in the United Kingdom, as well as a smaller impact from the loss of transitional service arrangements as the majority of these arrangements ended before the end of 2002.
As we continue our focused sales efforts, we expect that on-trade volume will continue to improve, but at a slower rate than in the third quarter. Third quarter off-trade volume was impacted by particularly hot weather this year and very weak volume last July as retailers worked off excess packaged beer inventories following the World Cup. The absence of these factors in the fourth quarter is expected to slow our off-trade growth. We are optimistic that we will continue to see better results from a better balance between growth and profit and that these will more than outweigh the profit impact of slower volume and share growth for the balance of the year.
For cost of goods sold in Europe, we anticipate that the fourth quarter will see more benefits from right-sizing our business and higher volume as the need for high-priced contract packaging services is significantly reduced due to our newly reconfigured lines and more efficient operation of the packaging in Burton.
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We anticipate that fourth quarter marketing, general and administrative expenses in Europe will reflect increased investment in marketing, selling and information systems, along with changes in exchange rates, versus a year ago. The lack of income from transitional service arrangements will be less important in the fourth quarter than earlier in 2003, since some of the these arrangements ended during the fourth quarter of 2002. Marketing, general and administrative expenses in the fourth quarter this year will also be favorably impacted by the comparison to one-time expenses incurred in the fourth quarter last year, primarily related to an adjustment to U.K. pension expense and a bad-debt write-off.
Interest Income and Expense
Consolidated 2003 interest income is expected to be fairly consistent with 2002, consisting primarily of U.K. trade loan interest income. Benefits derived from this income could also be impacted by fluctuations in our foreign currency translation on the GBP.
We anticipate that fourth quarter consolidated interest expense will be lower than a year ago due to the implementation of our commercial paper program and lower debt balances, which has already yielded interest savings.
Taxes
For the rest of the year, absent any unusual items, we expect that the consolidated fourth quarter tax rate will be about 34 - 35% and that our 2003 full-year tax rate will be in the range of 31 - 32%. We estimate that our tax rate in future years will be in the range of 35% to 37%, absent any unusual items and bearing in mind that our acquisition structure for CBL adds more volatility to our tax rate.
Our expectation for our full-year consolidated capital expenditures is between $250 million and $255 million. This estimate reflects a slight increase from 2002, driven by exchange rates and increases in capital expenditures at CBL in support of facilities improvements. Lower capital expenditures than prior year in the Americas are expected to partially offset Europe’s increase.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are consistent with those disclosed in our Form 10-K for the year ended December 29, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN No. 46), which is immediately effective for all enterprises with interests in variable interest entities created after January 31, 2003. We have no interests in variable interest entities created after January 31, 2003. Pursuant to an October 2003 amendment, FIN No. 46 must be applied to interests in variable interest entities created before February 1, 2003, beginning in the fourth quarter of 2003. We are currently assessing which of our investments qualify as variable interest entities, and whether we must consolidate those investments as the primary beneficiary. Under the current guidance, a primary beneficiary absorbs the majority of the entity’s expected losses if they occur, receives a majority of the entity’s expected residual returns if they occur, or both. A primary beneficiary relationship requires consolidation treatment. Where it is reasonably possible that the information about our variable interest entity relationships must be disclosed or consolidated, FIN No. 46 requires current disclosure of the nature, purpose, size and activity of the variable interest entity and the maximum exposure to loss as a result of our involvement with the variable interest entity (See Note 1 to the Condensed Consolidated Financial Statements).
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these statements by forward-looking words such as “expect,” “anticipate,” “plan,” “predict,” “believe,” “seek,” “estimate,” “outlook,” “trends,” “industry forces,” “strategies,” “goals” and similar words. Statements that we make in this report that are not statements of historical fact may also be forward-looking statements.
In particular, statements that we make under the headings “Narrative Description of Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Outlook for Remainder of 2003” including, but not limited to, statements relating to our overall volume trends, consumer preferences, pricing trends and industry forces, cost reduction strategies and anticipated results, our expectations for funding our 2003 capital expenditures and operations, debt service capabilities, shipment levels and profitability, increased market share and the sufficiency of capital to meet working capital, capital expenditures requirements and our strategies are forward-looking statements.
Forward-looking statements are not guarantees of our future performance and involve risks, uncertainties and assumptions that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. In particular, our future results could be affected by our acquisition of the CBL business in the United Kingdom and the substantial amount of indebtedness incurred to finance the acquisition, which could, among other things, hinder our ability to adjust rapidly to changing market conditions, make us more vulnerable in the event of a downturn and place us at a competitive disadvantage relative to less leveraged competitors. You should not place undue reliance on forward-looking statements. We disclaim any obligation to update any forward-looking statement and do not promise to notify you if we learn that our assumptions or projections are wrong for any reason. You should be aware that the factors we discuss in “Risk Factors” and elsewhere in this report could cause our actual results to differ from any forward-looking statements.
39
RISK FACTORS
These and other risks and uncertainties affecting us are discussed in greater detail in our other filings with the Securities and Exchange Commission, including our December 29, 2002, report on Form 10-K. You should consider carefully the following factors and the other information contained within this document. The most important factors that could influence the achievement of our goals and cause actual results to differ materially from those expressed in the forward-looking statements, include, but are not limited to, the following:
• We have a substantial amount of debt. As of September 28, 2003, we held approximately $1.36 billion in long-term debt primarily associated with the acquisition of CBL.
• Our primary production facilities in the United States and in the United Kingdom are each located at a single site, so we could be more vulnerable than our competitors to transportation disruptions, fuel price increases and natural disasters.
• We are significantly smaller than our two primary competitors in the United States, and may consequently be more vulnerable than our competitors to weather and economic disruptions in our markets, or other cost and price fluctuations.
• If any of our suppliers, including our joint ventures, are unable to meet our requirements, we may be unable to obtain the materials we need to operate our business.
• Government regulatory authorities in the markets in which we operate may increase excise taxes or adopt regulations that could increase other costs or liabilities, or could limit our business activities.
• If the social acceptability of our products declines, or if litigation is directed at the alcohol beverage industry, our sales volumes could decrease and our business could be adversely affected.
• A failure to successfully complete the implementation of our redesigned supply chain processes and systems in the United States in 2003 could adversely affect our ability to take distributor orders, plan and schedule production, ship our products, pay taxes and bill distributors for shipments.
• Any significant shift in packaging preferences in the beer industry could disproportionately increase our costs and could limit our ability to meet consumer demand.
• We depend on independent distributors in the United States to sell our products, with no assurance that these distributors will effectively sell our products.
• Since our sales volume is more concentrated in a few geographic areas in the United States, a loss of market share in these particular markets could have a material adverse effect on our results of operations.
• Our success depends largely on the success of two primary products, one in the United States and one in the United Kingdom; the failure or weakening of either could adversely affect our financial results.
• Consolidation of our key customers in the United Kingdom, especially pub chains, could impair our ability to achieve favorable pricing.
• We are subject to environmental regulation by federal, state and local agencies, including laws that impose liability without regard to fault.
• We may experience labor disruptions.
The foregoing list of important factors is not all-inclusive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in interest rates, the value of foreign currencies and various commodities. We have established policies and procedures that govern the management of these exposures through the use of a variety of financial instruments. By policy, we do not enter into such contracts for the purpose of speculation and we do not hedge the value of net investments in foreign-currency-denominated operations or translated earnings of foreign subsidiaries.
Our objective in managing our exposure to fluctuations in interest rates, foreign currency exchange rates and production and packaging materials prices is to decrease the volatility of earnings and cash flows affected by changes in the underlying rates and prices. To achieve this objective, we may enter into foreign currency forward contracts, commodity swaps, interest rate swaps and cross currency swaps, the values of which change in the opposite direction of the anticipated cash flows. Our primary foreign currency exposures are the British pound sterling (GBP), the Canadian dollar (CAD) and the Japanese yen (YEN).
Derivatives are either exchange-traded instruments or over-the-counter agreements entered into with highly rated financial institutions. No losses on over-the-counter agreements due to counterparty credit issues are anticipated. All over-the-counter agreements are entered into with counterparties rated no lower than A (S&P) or A2 (Moody’s). In some instances our counterparties and we have reciprocal collateralization agreements regarding fair value positions in excess of certain thresholds. These agreements call for the posting of collateral in the form of cash, treasury securities or letters of credit if a fair value loss position to our counterparties or us exceeds a certain amount. At September 28, 2003, no collateral was posted by our counterparties or us.
At September 28, 2003, we were a party to certain cross currency swaps totaling 530 million GBP (approximately $774 million at then-prevailing foreign currency exchange rates). The swaps include an initial exchange of principal on the settlement date of our 6 3/8 % private placement (see Footnote 9, Debt) and will require final principal exchange 10 years later. The swaps also call for an exchange of fixed GBP interest payments for fixed U.S. dollar interest receipts. At the initial principal exchange, we paid U.S. dollars to a counterparty and received GBP. Upon final exchange, we will provide GBP to the counterparty and receive U.S. dollars. The cross currency swaps have been designated as cash flow hedges of the changes in value of the future GBP interest and principal receipts that results from changes in the U.S. dollar to GBP exchange rates on an intercompany loan between CBL and us.
At September 28, 2003, we were a party to an interest rate swap agreement related to our 6 3/8 % fixed rate debt. The interest rate swap converted $76.2 million notional amount from fixed rates to floating rates and matures in 2012. We will receive fixed U.S. dollar interest payments semi-annually at a rate of 6 3/8% per annum and pay a rate to our counterparty based on a credit spread of 0.789% plus the three-month LIBOR rate, thereby exchanging a fixed interest obligation for a floating interest rate obligation. There was no exchange of principal at the inception of the swap. We designated the interest rate swap as a fair value hedge of the changes in the fair value of $76.2 million fixed-rate debt attributable to changes in the LIBOR swap rates.
We monitor foreign currency exchange risk, interest rate risk and other derivatives using two techniques - sensitivity analysis and Value-at-Risk. Our market-sensitive derivative and other financial instruments, as defined by the Securities and Exchange Commission (SEC), are foreign currency forward contracts, commodity swaps, interest rate swaps and cross currency swaps.
We use Value-at-Risk to monitor the foreign currency exchange and interest rate risk of our cross-currency swaps. The Value-at-Risk provides an estimate of the level of a one-day loss that may be equaled or exceeded due to changes in the fair value of these foreign currency exchange rate and interest rate-sensitive financial instruments. The type of Value-at-Risk model used to estimate the maximum potential one-day loss in the fair value is a variance/covariance method. The Value-at-Risk model assumes normal market conditions and a 95% confidence level. There are various modeling techniques that can be used to compute Value-at-Risk. The computations used to derive our values take into account various correlations between currency rates and interest rates. The correlations have been determined by observing foreign currency exchange market changes and interest rate changes over the most recent one-year period. We have excluded anticipated transactions, firm commitments, cash balances, and accounts receivable and payable denominated in foreign currencies from the Value-at-Risk calculation, some of which these instruments are intended to hedge.
The Value-at-Risk calculation is a statistical measure of risk exposure based on probabilities and is not intended to represent actual losses in fair value that we may incur. The calculated Value-at-Risk result does not represent the full extent of the possible loss that may occur. It attempts to represent the most likely measure of potential loss that may be experienced 95 times out of 100 due to adverse market events that may occur. Actual future gains and losses will differ from those estimated by Value-at-Risk because of changes or differences in market rates and interrelationships, hedging instruments, hedge percentages, timing and other factors.
The estimated maximum one-day loss in fair value on our cross-currency swaps, derived using the Value-at-Risk model, was $5.7 million and $8.6 million at September 28, 2003, and December 29, 2002, respectively. Such a hypothetical loss in fair value is a combination of the foreign currency exchange and interest rate components of the cross currency swap. Value changes due to the foreign currency exchange component would be offset completely by increases in the value of the underlying transaction being hedged, our inter-company loan. The hypothetical loss in fair value attributable to the interest rate component would be deferred until termination or maturity.
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Details of all other market-sensitive derivative and other financial instruments, including their fair values, are included in the table below. These instruments include foreign currencies, commodity swaps, interest rate swaps and cross-currency swaps.
NotionalPrincipalAmounts (USD)
Changes inFair Value
Maturity
Foreign currency management
Forwards
29,061
(1,533
10/03 – 7/05
Cross currency swap
773,800
(80,722
5/12
Commodity pricing management
Swaps
92,468
1,033
2/04 – 2/06
Interest rate pricing management
Interest rate swap
76,200
7,582
19,655
106
1/03 – 12/03
Cross currency swaps
(43,621
112,573
(4,630
3/03 – 9/04
8,493
Maturities of derivative financial instruments held on September 28, 2003, are as follows:
2003 (1)
2005 and thereafter
(809
(94
(72,737
(1) Amount includes the estimated deferred net loss of $1.0 million that is expected to be recognized over the next 12 months, on certain forward foreign currency exchange contracts and production and packaging materials derivative contracts, when the underlying forecasted cash flow transactions occur.
A sensitivity analysis has been prepared to estimate our exposure to market risk of interest rates, foreign currency exchange rates and commodity prices. The sensitivity analysis reflects the impact of a hypothetical 10% adverse change in the applicable market interest rates, foreign currency exchange rates and commodity prices. The volatility of the applicable rates and prices are dependent on many factors that cannot be forecast with reliable accuracy. Therefore, actual changes in fair values could differ significantly from the results presented in the table below.
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The following table presents the results of the sensitivity analysis of our derivative and debt portfolio:
ESTIMATED FAIR VALUE VOLATILITY
Foreign currency risk:
forwards, options
(3.4
(2.1
Interest rate risk:
debt, swaps
(33.7
(42.1
Commodity price risk:
swaps
(9.4
(10.8
We maintain disclosure controls and procedures that are based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c) under the Exchange Act. These controls and procedures are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
As of September 28, 2003, our Chief Executive Officer and Chief Financial Officer, with the assistance and participation of management, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings (including our consolidated subsidiaries).
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ITEM 1. LEGAL PROCEEDINGS
We are subject to claims and lawsuits arising in the ordinary course of business. We believe that the outcome of any such proceedings to which we are a party will not have a material adverse effect on us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2.1
Agreement and Plan of Merger dated August 14, 2003, by and between Adolph Coors Company, a Colorado corporation, and Adolph Coors Company, a Delaware corporation (incorporated by reference to Exhibit 2.1 to Form 8-K, filed October 6, 2003).
3.
Certificate of Incorporation of Adolph Coors Company, a Delaware corporation, dated August 14, 2003 (incorporated by reference to Annex B of the Proxy Statement on Schedule 14A, dated August 29, 2003).
Bylaws of Adolph Coors Company, a Delaware corporation (incorporated by reference to Annex C of the Proxy Statement on Schedule 14A, dated August 29, 2003).
3.2
Certificate of Merger of Adolph Coors Company, a Colorado corporation, with and in to Adolph Coors Company, a Delaware corporation.
10.20
Supply agreement between CBC and Owens-Brockway, Inc. dated July 29, 2003, effective August 1, 2003 (filed pursuant to Confidential Treatment).
10.21
Commercial Agreement (Packaging Purchasing) by and between Owens-Brockway Glass Container Inc. and Coors Brewing Company effective August 1, 2003 (filed pursuant to Confidential Treatment).
31.1
Certification of W. Leo Kiely II Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Timothy V. Wolf Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Written Statement of Chief Executive Officer and Chief Financial Officer Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Current report on Form 8-K dated July 24, 2003, regarding expected earnings for the second quarter of fiscal year 2003 ended June 29, 2003.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ RONALD A. TRYGGESTAD
Ronald A. Tryggestad
Vice President and Controller(Chief Accounting Officer)
November 12, 2003
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ExhibitNumber
Document Description
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