MSF 506 CASE STUDY: MOLSON COORS

ALTMAN Z-SCORE:
The Altman Z-score makes use of multiple financial ratios to predict a company's financial distress. It assigns weights to different financial ratios and comes up with a number to predict financial stability.

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FORMULA: Z= 1.2(X1)+1.4(X2)+3.3(X3)+0.6(X4)+1(X5)

X1 = WORKING CAPITAL / TOTAL ASSETS X2 = RETAINED EARNINGS / TOTAL ASSETS X3 = EBIT / TOTAL ASSETS X4 = MARKET VAL OF EQUITY / BOOK VAL OF DEBT X5 = SALES / TOTAL ASSETS

Total current assets Total current liabilities closing price of stock current portion of long term debt long term debt Parameters Working capital total assets EBIT market value of equity retained earnings sales Book value of debt

2010 2,220.90 1,333.90 48.39 1.1 1959.6 2010 887.00 12,697.60 908.4 7964.994 3241.5 3254.4 1960.7 2010 0.069855721 0.255284463 0.071541079 4.06232162 0.256300403

2011 2,118.00 1,277.20 43.22 46.9 1914.9 2011 840.80 12,423.80 882.2 7114.012 3689.7 3515.7 1961.8 2011 0.067676556 0.296986429 0.07100887 3.626267713 0.282981052

X1 X2 X3 X4 X5

Z SCORE FOR 2010 Z SCORE FOR 2011

3.371004048 3.19006382

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Interpretations of the z score:

Z < 1.81: Indicates a higher probability of bankruptcy 1.81 < Z < 2.99: This indicates a gray area and more analysis needs to be done to determine financial distress Z > 2.99: Indicates that the firm is financially stable and is not in financial distress The company has a Z-SCORE of over 3 for both the years 2010 and 2011. This indicates that the firm is financially stable and is not possible of being bankrupt in the near future in case of market shocks.

YEAR TO YEAR TREND AND PROFITABILITY ANALYSIS

Depreciation & amortization EBITDA

2010 202.3 $1,132.00

2011 217.1 $1,111.60

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Note: The EBITDA calculation involves in adding back depreciation and amortization from the cash flow statement and we add back the special items from the income statement as it is a non operating charge. We do not add back the other items on the cash flow statement like restructuring charges, goodwill, write downs as they are already incorporated in the special items account. This information is provided to us in the footnotes to the financial statements.

There has been a good increase in net sales. This shows that the company has a stable customer base. The gross profit and the operating profit have shown minor growth, however the EBIT is lower than the previous year. This is because there is a substantial difference in the other income account. The net income and EBITDA have reduced slightly this is because of the difference in the other
Year to Year Trend Analysis of income statement items from 20102011

Net Sales Gross Profit Operating Income EBIT INTEREST EXPENSE Net Income EBITDA

2010 $3,254.40 $1,442.20 $864.50 908.4 ($110.20) $707.70 $1,132.00

2011 $3,515.70 $1,466.60 $893.20 882.2 ($118.70) $676.30 $1,111.60

% change $ change 8.03% $261.30 1.69% $24.40 3.32% $28.70 -2.88% ($26.20) 7.71% ($8.50) -4.44% ($31.40) -1.80% ($20.40)

income.

Profitability ratio trends for years 2010 and 2011 2010 44.32% 26.56% 27.91% 2011 % change 41.72% -2.60% 25.41% -1.16% 25.09% -2.82%

gross margin operating margin EBIT margin

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Interest coverage Net margin EBITDA margin

8.24x 21.75% 34.78%

7.43x 19.24% 31.62%

-0.81x -2.51% -3.17%

The profitability ratios tell us that the trend has been a slight negative from last year. However all of these ratios are above the benchmarks that indicate stability. The company need not worry about the decline in these ratios as the decline is mainly because of non recurring operations and is not something that is expected to continue over the next few years. All in all the company has good profitability. Business segment analysis: Business Segment Analysis of the firm indicates MCBC USA outperforming other segments. It generated the highest amount of revenue and the operating income with an operating margin of 25.41% in 2011 and 26.56% in 2010. Canada was second best in terms of revenue and operating income with an operating margin of 22.97% in 2011 and 23.42% in 2010 respectively. The Canadian segment showed positive impact in 2011 due to favorable foreign currency movement and gain on sale of Montreal Canadians. The UK segment showed a slight improvement in sales, there was a minor decline in the operating margin. This segment was responsible for the acquisition of Sharps brewery and Doom bar. The Molson Coors International segment covers emerging markets, Asia , Mexico, Latin America, the Caribbean and continental Europe . Molson Coors collaborated with Sihai beer china and Cobra India. Although these mergers increased the net sales by 53.3%, an overall loss of 29% was incurred. This Analysis has been taken by referring the section of the management discussion and analysis segment in the annual report

FINANCIAL POSITION AND ROE ANALYSIS

The 3 step model is obtained from the more detailed 5 step model which is as follows:

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Net Income / EBT x EBT/ EBIT x EBIT/ Net sales x Net Sales/ Avg total assets x Avg total assets/ Common equity This equation translates into NET PROFIT MARGIN X ASSET TURNOVER X FINANCIAL LEVERAGE The excel calcualtions are shown below:
Total Assets Total Common Equity 2009 12021.1 7079.6 2010 12359.35 7439.2 2010 0.2633148 1.6613816 21.75% 2010 ROE 9.51% 2010 12697.6 7798.8 2011 12560.7 7723.35 2011 0.279896821 1.62814792 19.24% 2011 8.77% 2011 12423.8 7647.9

Average Total Assets Average Common Equity

Asset Turnover Financial Leverage Net margin

We see that the change in financial leverage is -0.03323368 Change in profitability is -0.025093766 Change in Asset Turnover is 0.016582003 We can see that even though asset turnover which is an increase in activity has increased the overall ROE is down by 0.75% This indicates that the change in financial leverage is primary driving factor for the decrease in ROE followed by profitability which is the secondary factor drving the negative change in ROE

Molson and Coors liquidity position:

Quantitative measures of liquidity for Molson - Coors.

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Measures of liquidity tell us if the company has liquidity enough to carry out its operations smoothly. Liquidity ratios that we will be using are : 1)CURRENT RATIO 2) WORKING CAPITAL TRENDS 3) QUICK RATIO 4) CASH FLOW RATIO 5) DEFENSIVE INTERVAL 2011 1,078.90 ---726 868.1

Cash and equivalents marketable securities accounts recievable Operating cash flows

CURRENT RATIO = WORKING CAPITAL = QUICK RATIO = CASH RATIO =

1.66x 840.80x 1.41x 0.84x

Molson and coors liquidity ratios are all above the benchmark for a stable company. These ratios are comphrehensive in the fact that they tell us if the company is able to finance its operations smoothly and has good liquidity in every aspect of its business. That is overall and also for carrying out the daily operations smoothly

Available lines of credit and access to capital markets: Based on communications with the lenders that are party to MCBCs credit facilities, they are confident in their ability to draw on such credit facilities if the need be. There were no outstanding borrowings on their 4-year revolving $400 million credit facility as of December 31, 2011, which was issued in the second quarter of 2011. Concurrently, MCBC terminated $750 million revolving credit facility in the second quarter 2011, which was scheduled to expire in August 2011. They also have uncommitted lines of credit with several banks should certain business units need additional short-term liquidity. Under the terms of some of their debt facilities, MCBC must comply with certain restrictions. As of December 31, 2011, they were in compliance with all of those restrictions.

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MCBCs primary sources of liquidity include cash provided by operating activities, access to external borrowings and monetization of assets. They believe that cash flows from operations, including distributions from MillerCoors, and cash provided by short-term and long-term borrowings, when necessary, will be more than adequate to meet their ongoing operating requirements, scheduled principal and interest payments on debt, and anticipated dividend payments and capital expenditures for the next twelve months and their long-term liquidity requirements. Settled all related derivatives, including our cross currency swap which effectively swapped our USD borrowing to CAD 355.5 million, as well as our forward starting interest rate swap. During the fourth quarter of 2010, our wholly owned subsidiary, Molson Coors International LP, completed a 7-year CAD 500.0 million 3.95% fixed rate Series A Notes private placement in Canada. The Series A Notes will mature on October 6, 2017. The notes are guaranteed by MCBC and certain of our United States and Canadian subsidiaries and rank equally with our other outstanding notes and our credit facility. The total short-term borrowing facilities consist of an overdraft facility of CAD $30.0 million at either USD Prime or CAD Prime depending on the borrowing currency, a line of credit for GBP $10.0 million and an overdraft facility for GBP 10.0 million, both at GBP LIBOR +1.5%, and a line of credit for Japanese Yen 1.5 billion (of which Japanese Yen 575.0 million is committed under an outstanding letter of credit, at a base rate of less than 1.0%). As of December 31, 2011 there were outstanding borrowings of $2.2 million under the Japanese Yen line of credit, and no borrowings under any of the other facilities. CAPITAL STRUCTURE ANALYSIS WITH RATIOS:
2010 Total Debt Total Capital Total Debt / Capital Total Debt / EBITDA 1960.7 9759.5 0.2009017 1.7320671 2011 1961.8 9609.7 0.204147892 1.764843469

We can see over the years of 2010 and 2011. Molson and coors has a capital structure which comprises of 20% debt and 80% equity on an average. This shows us that the company has strong equity capital and is not highly leveraged. This is really good as the company has room to take on leverage and go for major acquisitions in case a good opportunity comes along. Having less debt and leverage in the capital structure might also allow Molson and coors to hedge with derivative instruments without a heavy risk of being in danger in case of grave market shocks. ENTERPRISE VALUE:

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Enterprise Value = Market Value of Equity +Market value of Debt = Shares Outstanding X Share Price + Book Value of Debt X %Trading Value = 164.6 X 43.22 + 1961.8 X 0.95
The excel calculations for the enterprise value is shown below:
ENTERPRISE VALUE Market value of equity Market value of debt Enterprise value 2010 7964.994 1862.665 9827.659 2011 7114.012 1863.71 8977.722

The Enterprise value is a calculation that tells us what the market value of the firm is on a given date Since the enterprise value is a capital structure neutral metric. It is one value which can be used across various industries to compare companies with different capital structures AVERAGE TOTAL LIFE & AVERAGE AGE OF PPOE:

TOTAL LIFE = Gross Plant & Equipment

Current Years Depreciation Expense TOTAL AGE= Accumulated Depreciation Current years Depreciation Expense

Property , plant and equipment Current year depreciation Avg total life accumulated depreciation

2011 2450.2 177 13.842938 1020.1

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Avg total age

5.7632768

Molson Coors have capitalized the property, plant and equipment. Depreciation of their properties gradually over time indicates a smoother pattern of reporting income. This is a more aggressive strategy of reporting as compared to expensing.

MANAGEMENT CASE FORECAST

We prepared an income statement forecast in excel and we used the same skeleton to extend it to make the forecast for the income statement for the years

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2012, 2013 and 2014. Our excel calculations indicate the forecasts used by the management. INCOME STATEMENT FORECAST

Net sales % of growth Cost of goods % of sales Gross Profit % of sales SG &A % of sales Special Items % of sales Equity income

2012 3751.2519 6.70% 2177.2266 58.04% 1574.0253 41.96% ($1,122.90 ) 29.93% ($8.40)

2013 3972.5758 5.90% 2296.1488 57.80% 1676.427 42.20% ($1,192.17 ) 30.01% ($6.30)

2014 4095.7256 3.10% 2357.4997 57.56% 1738.2259 42.44% ($1,214.08 ) 29.64% ($3.80)

$463.85 Operating income % of sales Interest expense % of sales Interest income % of sales Other income Total other income % of sales Income from cont operations Income tax benefit $816.10 ($306.04) Net income $510.06 21 ($90.48) 10.9 ($122.38) $906.58

$474.99 $952.94 ($126.17) 10.9 35 ($80.27) $872.67 ($327.25) $545.42

$487.81 $1,008.15 ($130.08) 10.9 ($38.00) ($157.18) $850.97 ($319.11) $531.85

Gross Margin 2012 : Gross Margin 2011 + 0.24% = 41.96% Gross Margin 2013 : Gross Margin 2012 + 0.24% = 42.20% Gross Margin 2014 : Gross Margin 2013 + 0.24% = 42.44%
FORECAST FOR THE STATEMENT OF FREE CASH FLOWS:

Statement of free cash flows 2012 2013 2014

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EBIT

$927.58 2012

$987.94 2013 237.53258 ($6.30) $1,231.78 280 98 $130.90 2013 $1,002.88

$970.15 2014 248.4590824 ($3.80) $1,222.41 295 103.25 $127.64 2014 $991.51

Depreciation and amortization Special Items EBITDA CAPEX -MAINTENANCE CAPEX -DIVIDENDS FREE CASH FLOW

227.0866 ($8.40) $1,163.07 255 89.25 $122.42 2012 $951.40

FIXED CHARGE COVERAGE RATIOS FOR 2012,2013, 2014

FIXED CHARGE COVERAGE :

2012 PRINCIPAL PAYMENTS RENT EXPENSE FIXED CHARGE COVERAGE 46.9 30 2.87667217

2013 575 24.1 1.3161914

2014 0 17.4 $3.28

COMMENTS ABOUT THE TRENDS IN THE MANAGEMENT FORECAST: There has been a continual increase in the sales growth and the gross margin has increased continually. An observable change in the other income has led to a decrease in the net income for 2014. The interest expense is gradually increasing.

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This is because of higher leverage. The EBITDA shows an increase in the year 2013. However, a lower net income in the year 2014 causes the EBITDA to decline slightly. The company will declare lower dividends that slightly boost the Free Cash Flow in that year. The company has adequate free cash flow to continue its operations. The fixed charge coverage remains above the benchmark of 1.0x each year. There is a drop in the ratio in the year 2013. This is because of a heavy principal repayment. As a result of this the company does not make any principal repayments in 2014. The fixed charge coverage ratios indicate the companys ability to cover their fixed costs really efficiently.

STUDENT CASE REVIEW AND FORECAST

Review of the beer and alcohol industry:

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Though beer is still the country's best-selling alcoholic beverage, more Americans are finding that suds are somewhat flat Liquor and wine continued to eat away at beer's commanding share of U.S. alcohol sales in 2011, according to an annual report issued Monday by the Distilled Spirits Council of the United States. The trade group pointed to a surge in exports, improved marketing support, legalization of Sunday liquor sales, new flavors and an improving economy, among other factors, that fueled a 4 percent increase in liquor sales, to $19.92 billion. Liquor now comprises 33.6 percent of alcohol sales, wine accounts for 17.1 percent and beer has 49.2 percent of the $59.24 billion alcohol industry. The data represents sales by manufacturers and importers, not retail sales. Aside from modest growth in 2008, beer has lost market share to liquor for each of the last 13 years. Still, the beer industry argues that liquor's growth has been slow, while a retailer said that craft beer presents a potential threat to liquor and wine as it woos customers away Sales of "high-end" brands were up 5.3 percent last year, in line with the pre-recession average of 5.8 percent. By comparison, sales of high-end brands were up just 3.3 percent in 2010 and in 2009 they dropped 3.5 percent "Ten years ago you might have a drinker who had a Bud 90 percent of the time, and today maybe 60 percent of the time he's having a Bud and splitting the other 40 percent between rum and Coke, bourbon and ginger, and maybe a margarita,"

Our assumptions of items on the income statement:

2012

2013

2014

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NET SALES GROSS MARGIN MG&A Interest expense

9.00% 43.32% 31.9% 2.50%

-2.80% 40.32% 29.68% 6.00%

1.20% 41.02% 30.81% 4.00%

Rationale for variable selection: Our variables have been selected taking into account the additional assumptions provided about the economic activity in the years of 2012, 2013 and 2013 We believe that the net sales and the gross margin will increase in the year 2012 as the company will acquire a major eastern European company that year. The recession will then lead to a decrease in the net sales as people around the world will tend to spend less and hence consume less. 2014 will be a year of recovery and hence the net sales and the gross margin will increase relatively. This increase will however be less as compared to the increase in the previous years. This is because it will take time for total recovery. The MG& A will increase the year of the acquisition. This is because we believe that the company will follow an aggressive marketing strategy that year. The year of 2013 will force the company to cut down on costs and hence it will reduce the MG & A. We then remain consistent with our growth slump growth trend for the year 2014 as economic recovery will spur more spending . The interest expense for 2012 has been taken as 2.5 % which is lesser than the previous years as we believe that the company on acquiring a major brewing company will have better credibility in the market and hence increase its credit rating above the BBB+. We also believe that the company will have better revolving lines of credit and better access to capital markets following the acquisition. 2013 which will be a year of recession will cause the interest rates to go up since governments will want to facilitate lending which is why we take the interest rate as 6%. 2014, although a year of recovery will still early enough for interest rates to come back to normal, for this reason we take the rate to be 4 %.

Our income statement forecast:

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Net sales % of growth Cost of goods % of sales Gross Profit SG &A % of sales Special Items % of sales Equity income Operating income Interest expense % of sales Interest income % of sales Other income Total other income % of sales Income from cont operations Income tax benefit Net income

2012 3832.113 9.00% 2172.0416 56.68% 1660.0714 43.32% ($1,223.74) 31.93% ($8.40) $463.85 $891.78 ($95.80) 2.50% 10.7 21 ($64.10) $827.68 ($310.38) $517.30

2013 3724.8138 -2.80% 2222.9689 59.68% 1501.8449 40.32% ($1,105.40) 29.68% ($6.30) $474.99 $865.13 ($223.49) 6.00% 10.7 35 ($177.79) $687.34 ($257.75) $429.59

2014 3769.5116 1.20% 2223.2579 58.98% 1546.2537 41.02% ($1,161.21) 30.81% ($3.80) $487.81 $869.05 ($150.78) 4.00% 10.7 ($38.00) ($178.08) $690.97 ($259.12) $431.86

Statement of free cash flows and fixed charge coverage:

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FREE CASH FLOW STATEMENT 2012 EBIT $912.78 2013 $900.13 2014 $831.05

Depreciation and amortization Special Items EBITDA CAPEX MAINTENANCE CAPEX DIVIDENDS FREE CASH FLOW

227.0866 ($8.40) $1,131.47 255 89.25 $155.19 $887.03

237.532584 ($6.30) $1,131.36 280 98 0 $1,033.36

248.4590824 ($3.80) $1,075.71 295 103.25 $64.78 $907.68

2012 PRINCIPAL PAYMENTS RENT EXPENSE FIXED CHARGE COVERAGE 46.9 30 $2.78

2013 575 24.1 $1.26

2014 0 17.4 $3.25

Our comments on the trend and the statement of free cash flows: We see that net income is good in the year 2012.It is lower than the net income in the year 2011. This is because we had to assume a higher tax rate that is given by the management . The net income comes substantially down in 2013, this is because of the recession in that year. The net income must improve in 2014, however the negligible improvement is because of the recovery not being full fledged in the year according to our assumptions and also because there is a substantial decline in the other income.

The EBITDA does not show any substantial change even though there is a recession year, this is because apart from the assumptions that affect mainly operating income, the other assumptions are taken from the management forecast and these assumptions do not clearly reflect the state of the economy at that time. We have also assumed that the company will not pay any dividends in the recession year so that they can have a stronger cash flow, this is why the free cash flow in the year 2013 is higher. According to our assumptions the company will start paying dividends again in the year of recovery and this is why the free cash flow in the year 2014 is lower.

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The fixed charge coverage ratios are similar to the management forecast this is because the accounts that were involved in calculation were assumed to be the same as the management forecast , however these ratios are also consistent with our growth, slump, growth trend.

Adjusted Financial Analysis

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Adjusted Income Statement for Fiscal Year 2011:

2011(GAAP) Net sales Cost of goods % of sales Gross Profit % of sales SG &A % of sales Special Items % of sales Equity income Operating income % of sales Interest expense % of sales Interest income % of sales Other income Total other income % of sales Income from cont operations Income tax benefit Net Income from Cont. Operations Income from discontinued operations Net income incl non cntrl interests Net income attributable to non cntrl interests Net income % of sales other comprehensive income Acquisition Net income( Non GAAP) 3.38% $893.20 ($99.40) $793.80 2.3 $796.10 ($0.80) $795.30 19.24% $3,515.70 ($2,049.10) 58.28% $1,466.60 41.72% ($1,019.00) 28.98% ($12.30) 0.35% $457.90 $893.20 25.41% ($118.70) 3.38% 10.7 0.30% ($11.00)

ADJUSTMENTS

2011(Non GAAP) $3,515.70 ($2,049.10) $1,466.60

$35.00 12.3

($984.00) $0.00 $457.90 $940.50

$35.00

($153.70) 10.7 ($11.00) ($154.00) $786.50 ($294.94) $491.56 2.3 $493.86 ($0.80) $493.06

($300.80) 41

($300.80) 41 $233.26

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Adjusted Income Statement for Fiscal Year 2010:

2010 Net sales $3,254.40

ADJUSTMENTS

2010(Non GAAP) $3,254.40

Cost of goods % of sales Gross Profit SG &A

($1,812.20)

($1,812.20)

$1,442.20 ($1,012.50) 35

$1,442.20 ($977.50)

Special Items

($21.30)

21.3

$0.00

Equity income Operating income Interest expense

$456.10 $864.50 ($110.20) 35

$456.10 $920.80 ($145.20)

Interest income

10.8

10.8

Other income Total other income

43.9

43.9 ($90.50)

Income from cont operations Income tax benefit

$864.50 ($138.70)

$830.30 ($311.36)

Net Income from Cont. Operations Income from discontinued operations Net income incl non cntrl interests Net income attributable to non cntrl interests

$725.80 39.6 $765.40 ($2.20)

$518.94 39.6 $558.54 ($2.20)

Net income

$763.20

$556.34

other comprehensive income Acquisition Net income( Non GAAP)

150 19.8

$706.34 $726.14 $726.14

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Details of Adjustments:

Restructuring charges should be adjusted (excluded) in the Income Statement, as they are non-recurring. (Income Statement). Asset impairment charges should be adjusted (excluded) in the Income Statement, as they are non-recurring. (Income Statement). Unrealized gains or losses on marketable securities should be included in the Income Statement. After reading the footnotes we find that all of the above item s are a part of the special items and hence we have eliminated special items from the adjusted statements. Operating leases are capitalized. Since rent expense is included as a part of MG&A, we add back rent expense to MG&A and include those payments in Interest Expense. Acquisitions that were made in 2010 and 2011 are accounted for. Gains or losses realized on sale of assets(all of these are found in the other comprehensive income in the consolidated financial statements which are in the annual report)

Adjusted ROE and ROA:

ROE(Non GAAP) Net Income Shareholders equity ROE ROE(GAAP) ROA Net income Total assets ROA ROA(GAAP) $233.26 12423.8 1.88% 5.44% $233.26 7647.9 3.05% 8.77%

The ROA and ROE have decreased substantially in the adjusted financial analysis. This is because there is a significant decline in the net income. This decline is

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mainly because of a deduction of other comprehensive income. The ratios however are still positive and are not indicative or any flaw with the company. The other comprehensive income is something that fluctuates and will not harm the company functioning adversely. So even with the adjusted ratios we can conclude that the company is healthy

Sustainable cash flow:

Sustainable cash flow: Operating cash flow for year 2011 operating cash flow 2010 868.1 749.7 Adjustments Income tax payment 2011 additional pension plan Pending lawsuit annual insurace payment sale of accounts recievable outside consulting fees restructuring charge inventory buildup Sustainable cash flow type of charge non recurring non recurring non recurring recurring non recurring non recurring non recurring non recurring $6.40 $21.00 $6.00 0 0 $8.40 ($8.30) 30.1 9.7 $909.90 $781.20

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