Case Study Molson Coors

Brewing CompanyStudent: Duc Manh Nguyen

Rohit Mangla

Instructor: Dr. Michael Favere-Marchesi

Main objectives

Classified Income statements

Earning persistence

Operational performance ratios

Concepts – aMajor classifications on

IS Revenue, Net revenue (minus excise taxes)

Gross profit ( by subtracting COGS)

Operating expenses

Non-operating expenses/income

Income before tax(EBT)

Income after net-tax items( extraordinary income, income from discontinued operations)

EPS, Diluted EPS

Concept - bClassified IS under US

GAAPTo make IS easier for users to

read and analyze the expenses and incomes It provides categories for expenses

by functionIt uses sub-total in calculating

income, expensesIt is more detailed than the single-

step IS

Concept cPersistent Income

It excludes the infrequent or unusual, extraordinary items in income statement.

Analyst normally adjust for better forecast future cash flow

It is necessary to understand how the current income is generated.

Concept dComprehensive Income

Comprehensive income = Change in owner’s equity due to operating income + Change in owner’s equity due to gain from non owners sources.

(Source of non – owners equity : marketable securities intended for sale, transactions in foreign currency (gain/loss), pension plans (overfunded/ underfunded)

Process eNet Sales vs Sales

Net Sales = Total sales – return of defected products – discounts (payment schemes) – allowance ( misplaced/damaged in transit goods)

Sales/Gross Sales – any kind of sale in a given period of time with out any deductions of any sort.

It gives more clear picture about the sales done by the company.

Process eNet Sales vs Sales

Various programs run by Molson Coors which result in reduction of sales

Price Promotion, Rebate and coupons.

Slotting or listing fees paid to customers

(these programs are considered as reduction in sales by MCBC)

It is also a good measure check the trend in defects/returns etc.

Process f, part ISpecial items on IS

The items that are not indicative of their core operations, they are still classified as operating expense and are not necessarily non-recurring. Infrequent or unusual items Impairment or asset abandonment-related losses Restructuring charges and other atypical

employee-related costs. or Fees on termination of significant operating

agreements and gains (losses) on disposal of investments.

Process f, part IISpecial items on IS

Separate line item Readers can easily compare core-operating and

“special” expense part. Easier to analyze the pure operating income

Classify as Operating Expense Red flag: Indicates instability of the business.

Process gOther income(expense),

netOther income (expense), net

is expense or gain from financing or investment activities like interest expense for the debt, interest income. It should not be included in operating activities

Process hStatement of comprehensive

income

Comprehensive income = $ 760.2 Million

Net Income (Operating Income) = $ 572.5 Million

24.6 % of the comprehensive income comes from unrealized activities.

ii. They are the income that must bypass the net income in the income statement because they have not realized.

They are foreign currency translation adjustments, unrealized gain/losses on derivatives instruments, pension and other postretirement benefit adjustment, the changes in equity due to non-owner sources.

Analysis INon-persistent items on

ISSpecial items: it contains restructuring

cost, impairment asset or asset abandonment…Therefore, they could occur again but very likely fluctuate.

Income from discontinued operations: non recurring item

Other income(expense), net: They could occur again but very likely fluctuate.

Analysis jIncome taxes

Effective tax rate = tax expense/ taxable income = 84/ 654.5 = 12.8% (year 2013)

The persist tax rate could be 12.8% Because the increase in 2012 effective tax is

only due to the increased statutory corporate income tax rate in Serbia from 10% to 15%, leads to the change between book value and tax basis of intangible assets purchased through acquisitions, leads to increasing DTL and increases valuation allowance to 6%.

Analysis kEstimation of persistent

income

Analysis L i. non operating items

on IS Other income (expense), net

Interest expense

Interest income

Other income (expense), net

Income from discontinued operations

Net loss (income) attribute to non-controlling interest

Analysis L ii. Total after-tax non-operating

item

Analysis Liii. Net operating profit after

tax

Analysis Liii. Net operating profit after

tax

NOPAT accounts for the fact that this company has a large amount of tax saving due to an essential part of debt in Liabilities. It is a better measure of income from leveraged firms.

Analysis mi. nonoperating items in

BSNon-operating assets: cash. It does not

contribute to the future generation of operating cash flow for firms. It would be excluded in the valuation of firm based on a discounted future earning cash flows model.

Non-operating liabilities: Long-term debt (which already included capital lease) considered to be financial liabilities. This is basically the leverage part of the firm, it should not be included when calculating net operating assets.

Analysis mii. Net operating assets

Analysis mii. Net operating assets

Net operating assets figure is useful for comparison to the net operating profit of a business .

In short, the net operating assets concept is intended to reveal the relationship between core earnings and core net assets, ignoring all financial engineering. This is an excellent basis of comparison when examining the financial structures of the businesses in an industry.

Analysis nReturn on net operating

asset

Analysis oOperating profit margin and Net operating asset turnover

Analysis o

Operating profit margin evaluates how effective a firm is operating.

Net operating asset turnover measures the efficiency of how a company is using its operating assets to generate operating income.

These ratios could be compared within the company over time or with other company in the industry, the higher the better.

Analysis pRNOA= Persistent net operating income / net operating Assets

Analysis pRNOA= Persistent net operating income / net operating

Assets

The new RNOA shows a more reliable results as it increases slightly from 2012 to 2013.

The old RNOA decreases nearly 1% over the period. That is due to the inclusion of Special items, which was considered to be non recurring item in the new RNOA calculation.

As stated in the footnote 1: “Although we believe these items are not indicative of our core operations, the items classified as special items are not necessarily non-recurring”. Therefore, the classification of this item as operating expenses is also not necessarily unbiased. As we are predicting the future profitability, we should use a stricter rule to calculate operating expenses.