msf 506-final document

7/27/2019 MSF 506-Final Document

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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 financialstability.


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Z SCORE FOR 2010 3.371004048

Z SCORE FOR 2011 3.19006382

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 ASSETSX3 = EBIT / TOTAL ASSETS

X4 = MARKET VAL OF EQUITY / BOOK VAL OF DEBTX5 = SALES / TOTAL ASSETS

2010 2011

Total current assets 2,220.90 2,118.00

Total current liabilities 1,333.90 1,277.20

closing price of stock 48.39 43.22

current portion of long term debt 1.1 46.9

long term debt 1959.6 1914.9

Parameters 2010 2011

Working capital 887.00 840.80

total assets 12,697.60 12,423.80

EBIT 908.4 882.2

market value of equity 7964.994 7114.012

retained earnings 3241.5 3689.7

sales 3254.4 3515.7

Book value of debt 1960.7 1961.8

2010 2011

X1 0.069855721 0.067676556X2 0.255284463 0.296986429

X3 0.071541079 0.07100887

X4 4.06232162 3.626267713

X5 0.256300403 0.282981052


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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 todetermine financial distress

Z > 2.99: Indicates that the firm is financially stable and is not in financialdistress

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 beingbankrupt in the near future in case of market shocks.

YEAR TO YEAR TREND AND PROFITABILITY ANALYSIS

2010 2011

Depreciation & amortization 202.3 217.1EBITDA $1,132.00 $1,111.60


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There has been a good increase in net sales. This shows that the company has astable customer base. The gross profit and the operating profit have shownminor growth, however the EBIT is lower than the previous year. This is becausethere is a substantial difference in the other income account. The net incomeand EBITDA have reduced slightly this is because of the difference in the other

income.

Profitability ratio trends for years 2010 and

2011

2010 2011 % change

gross margin 44.32% 41.72% -2.60%

operating margin 26.56% 25.41% -1.16%EBIT margin 27.91% 25.09% -2.82%

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.

Year to Year Trend Analysis of income statement items from 2010-

2011

2010 2011 % change $ change

Net Sales $3,254.40 $3,515.70 8.03% $261.30

Gross Profit $1,442.20 $1,466.60 1.69% $24.40

Operating Income $864.50 $893.20 3.32% $28.70

EBIT 908.4 882.2 -2.88% ($26.20)

INTEREST EXPENSE ($110.20) ($118.70) 7.71% ($8.50)Net Income $707.70 $676.30 -4.44% ($31.40)

EBITDA $1,132.00 $1,111.60 -1.80% ($20.40)


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Interest coverage 8.24x 7.43x -0.81x

Net margin 21.75% 19.24% -2.51%

EBITDA margin 34.78% 31.62% -3.17%

The profitability ratios tell us that the trend has been a slight negative from lastyear. 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 ismainly because of non recurring operations and is not something that isexpected to continue over the next few years. All in all the company has goodprofitability.

Business segment analysis:

Business Segment Analysis of the firm indicates MCBC USA outperforming othersegments. 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 anoperating margin of 22.97% in 2011 and 23.42% in 2010 respectively. TheCanadian segment showed positive impact in 2011 due to favorable foreigncurrency movement and gain on sale of Montreal Canadians.

The UK segment showed a slight improvement in sales, there was a minordecline in the operating margin. This segment was responsible for theacquisition of Sharps brewery and Doom bar.

The Molson Coors International segment covers emerging markets, Asia , Mexico,Latin America, the Caribbean and continental Europe . Molson Coorscollaborated with Sihai beer china and Cobra India. Although these mergersincreased the net sales by 53.3%, an overall loss of 29% was incurred.

This Analysis has been taken by referring the section of the managementdiscussion 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 assetsx Avg total assets/ Common equity

This equation translates into

NET PROFIT MARGIN X ASSET TURNOVER X FINANCIAL LEVERAGE

The excel calcualtions are shown below:

2009 2010 2011

Total Assets 12021.1 12697.6 12423.8

Total Common Equity 7079.6 7798.8 7647.9

2010 2011

Average Total Assets 12359.35 12560.7

Average Common Equity 7439.2 7723.35

2010 2011

Asset Turnover 0.2633148 0.279896821

Financial Leverage 1.6613816 1.62814792

Net margin 21.75% 19.24%

2010 2011

ROE 9.51% 8.77%

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

Cash and equivalents 1,078.90

marketable securities ----

accounts recievable 726

Operating cash flows 868.1

CURRENT RATIO = 1.66x

WORKING CAPITAL = 840.80x

QUICK RATIO = 1.41x

CASH RATIO = 0.84x

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

Available lines of credit and access to capital markets:

Based on communications with the lenders that are party to MCBCs creditfacilities, they are confident in their ability to draw on such credit facilities if theneed be. There were no outstanding borrowings on their 4-year revolving $400million credit facility as of December 31, 2011, which was issued in the secondquarter of 2011. Concurrently, MCBC terminated $750 million revolving creditfacility in the second quarter 2011, which was scheduled to expire in August2011. They also have uncommitted lines of credit with several banks shouldcertain business units need additional short-term liquidity.

Under the terms of some of their debt facilities, MCBC must comply with certainrestrictions. As of December 31, 2011, they were in compliance with all of thoserestrictions.


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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 cashflows from operations, including distributions from MillerCoors, and cashprovided by short-term and long-term borrowings, when necessary, will be more

than adequate to meet their ongoing operating requirements, scheduledprincipal and interest payments on debt, and anticipated dividend payments andcapital expenditures for the next twelve months and their long-term liquidityrequirements.

Settled all related derivatives, including our cross currency swap whicheffectively swapped our USD borrowing to CAD 355.5 million, as well as ourforward starting interest rate swap. During the fourth quarter of 2010, ourwholly owned subsidiary, Molson Coors International LP, completed a 7-yearCAD 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 byMCBC and certain of our United States and Canadian subsidiaries and rankequally 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 borrowingcurrency, a line of credit for GBP $10.0 million and an overdraft facility for GBP10.0 million, both at GBP LIBOR +1.5%, and a line of credit for Japanese Yen 1.5billion (of which Japanese Yen 575.0 million is committed under an outstandingletter of credit, at a base rate of less than 1.0%). As of December 31, 2011 therewere 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 2011

Total Debt 1960.7 1961.8

Total Capital 9759.5 9609.7

Total Debt / Capital 0.2009017 0.204147892

Total Debt / EBITDA 1.7320671 1.764843469

We can see over the years of 2010 and 2011. Molson and coors has a capitalstructure which comprises of 20% debt and 80% equity on an average. Thisshows 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 majoracquisitions in case a good opportunity comes along. Having less debt andleverage in the capital structure might also allow Molson and coors to hedge withderivative 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

2010 2011

Market value of equity 7964.994 7114.012

Market value of debt 1862.665 1863.71

Enterprise value 9827.659 8977.722

The Enterprise value is a calculation that tells us what the market value of thefirm is on a given date

Since the enterprise value is a capital structure neutral metric. It is one valuewhich can be used across various industries to compare companies withdifferent capital structures

AVERAGE TOTAL LIFE & AVERAGE AGE OF PPOE:

TOTAL LIFE = Gross Plant & EquipmentCurrent Years Depreciation Expense

TOTAL AGE= Accumulated DepreciationCurrent years Depreciation Expense

2011

Property , plant and equipment 2450.2

Current year depreciation 177

Avg total life 13.842938accumulated depreciation 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 smootherpattern of reporting income. This is a more aggressive strategy ofreporting 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 themanagement.

INCOME STATEMENT FORECAST

Net sales 2012 2013 2014

% of growth 3751.2519 3972.5758 4095.7256

Cost of goods 6.70% 5.90% 3.10%

% of sales 2177.2266 2296.1488 2357.4997

Gross Profit 58.04% 57.80% 57.56%

% of sales 1574.0253 1676.427 1738.2259

SG &A 41.96% 42.20% 42.44%

% of sales

($1,122.90

)

($1,192.17

)

($1,214.08

)

Special Items 29.93% 30.01% 29.64%% of sales ($8.40) ($6.30) ($3.80)

Equity income

$463.85 $474.99 $487.81

Operating income

% of sales $906.58 $952.94 $1,008.15

Interest expense

% of sales ($122.38) ($126.17) ($130.08)

Interest income

% of sales 10.9 10.9 10.9

Other income

Total other income 21 35 ($38.00)

% of sales ($90.48) ($80.27) ($157.18)

Income from cont operations

Income tax benefit $816.10 $872.67 $850.97

($306.04) ($327.25) ($319.11)

Net income $510.06 $545.42 $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 flows2012 2013 2014


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EBIT $927.58 $987.94 $970.15

2012 2013 2014

Depreciation and amortization 227.0866 237.53258 248.4590824

Special Items ($8.40) ($6.30) ($3.80)

EBITDA $1,163.07 $1,231.78 $1,222.41

CAPEX 255 280 295

-MAINTENANCE CAPEX 89.25 98 103.25

-DIVIDENDS $122.42 $130.90 $127.64

2012 2013 2014

FREE CASH FLOW $951.40 $1,002.88 $991.51

FIXED CHARGE COVERAGE RATIOS FOR 2012,2013, 2014

FIXED CHARGE COVERAGE :

2012 2013 2014

PRINCIPAL PAYMENTS 46.9 575 0

RENT EXPENSE 30 24.1 17.4

FIXED CHARGE

COVERAGE 2.87667217 1.3161914 $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 adecrease 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 inthe year 2014 causes the EBITDA to decline slightly. The company will declarelower 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. Thereis a drop in the ratio in the year 2013. This is because of a heavy principalrepayment. As a result of this the company does not make any principalrepayments in 2014. The fixed charge coverage ratios indicate the companysability 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, moreAmericans 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, newflavors and an improving economy, among other factors, that fueled a 4percent increase in liquor sales, to $19.92 billion.

Liquor now comprises 33.6 percent of alcohol sales, wine accounts for17.1 percent and beer has 49.2 percent of the $59.24 billion alcoholindustry. The data represents sales by manufacturers and importers, notretail 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 aretailer 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 thepre-recession average of 5.8 percent.

By comparison, sales of high-end brands were up just 3.3 percent in 2010and in 2009 they dropped 3.5 percent

"Ten years ago you might have a drinker who had a Bud 90 percent of thetime, 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 9.00% -2.80% 1.20%

GROSS MARGIN 43.32% 40.32% 41.02%

MG&A 31.9% 29.68% 30.81%

Interest expense 2.50% 6.00% 4.00%

Rationale for variable selection:

Our variables have been selected taking into account the additional assumptionsprovided 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 2012as the company will acquire a major eastern European company that year. Therecession will then lead to a decrease in the net sales as people around the worldwill tend to spend less and hence consume less. 2014 will be a year of recoveryand 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 believethat the company will follow an aggressive marketing strategy that year. Theyear of 2013 will force the company to cut down on costs and hence it willreduce the MG & A. We then remain consistent with our growth slump growthtrend 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 theprevious years as we believe that the company on acquiring a major brewing

company will have better credibility in the market and hence increase its creditrating above the BBB+. We also believe that the company will have betterrevolving lines of credit and better access to capital markets following theacquisition. 2013 which will be a year of recession will cause the interest rates togo up since governments will want to facilitate lending which is why we take theinterest rate as 6%. 2014, although a year of recovery will still early enough forinterest 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 2012 2013 2014

% of growth 3832.113 3724.8138 3769.5116

Cost of goods 9.00% -2.80% 1.20%

% of sales 2172.0416 2222.9689 2223.2579

Gross Profit 56.68% 59.68% 58.98%

1660.0714 1501.8449 1546.2537

SG &A 43.32% 40.32% 41.02%

% of sales

Special Items ($1,223.74) ($1,105.40) ($1,161.21)

% of sales 31.93% 29.68% 30.81%

($8.40) ($6.30) ($3.80)

Equity income $463.85 $474.99 $487.81

Operating income $891.78 $865.13 $869.05

Interest expense ($95.80) ($223.49) ($150.78)

% of sales 2.50% 6.00% 4.00%

Interest income 10.7 10.7 10.7

% of sales

Other income 21 35 ($38.00)

Total other income ($64.10) ($177.79) ($178.08)

% of sales

Income from cont operations $827.68 $687.34 $690.97

Income tax benefit ($310.38) ($257.75) ($259.12)

Net income $517.30 $429.59 $431.86

Statement of free cash flows and fixed charge coverage:


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FREE CASH FLOW STATEMENT

2012 2013 2014

EBIT $912.78 $900.13 $831.05

Depreciation and amortization 227.0866 237.532584 248.4590824

Special Items ($8.40) ($6.30) ($3.80)

EBITDA $1,131.47 $1,131.36 $1,075.71

CAPEX 255 280 295

MAINTENANCE CAPEX 89.25 98 103.25

DIVIDENDS $155.19 0 $64.78

FREE CASH FLOW $887.03 $1,033.36 $907.68

2012 2013 2014

PRINCIPAL PAYMENTS 46.9 575 0

RENT EXPENSE 30 24.1 17.4

FIXED CHARGE COVERAGE $2.78 $1.26 $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 incomein the year 2011. This is because we had to assume a higher tax rate that is givenby the management . The net income comes substantially down in 2013, this isbecause of the recession in that year. The net income must improve in 2014,however the negligible improvement is because of the recovery not being fullfledged in the year according to our assumptions and also because there is asubstantial decline in the other income.

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


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The fixed charge coverage ratios are similar to the management forecast this isbecause the accounts that were involved in calculation were assumed to be thesame as the management forecast , however these ratios are also consistent withour growth, slump, growth trend.

Adjusted Financial Analysis


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Adjusted Income Statement for Fiscal Year 2011:

2011(GAAP) ADJUSTMENTS 2011(Non GAAP)

Net sales $3,515.70 $3,515.70

Cost of goods ($2,049.10) ($2,049.10)

% of sales 58.28%

Gross Profit $1,466.60 $1,466.60

% of sales 41.72%

SG &A ($1,019.00) $35.00 ($984.00)

% of sales 28.98%

Special Items ($12.30) 12.3 $0.00

% of sales 0.35%

Equity income $457.90 $457.90

Operating income $893.20 $940.50

% of sales 25.41%

Interest expense ($118.70) $35.00 ($153.70)

% of sales 3.38%

Interest income 10.7 10.7

% of sales 0.30%

Other income ($11.00) ($11.00)

Total other income ($154.00)

% of sales 3.38%

Income from cont operations $893.20 $786.50

Income tax benefit ($99.40) ($294.94)

Net Income from Cont. Operations $793.80 $491.56

Income from discontinued operations 2.3 2.3

Net income incl non cntrl interests $796.10 $493.86

Net income attributable to non cntrl

interests ($0.80) ($0.80)

Net income $795.30 $493.06

% of sales 19.24%

other comprehensive income ($300.80) ($300.80)

Acquisition 41 41

Net income( Non GAAP) $233.26


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Adjusted Income Statement for Fiscal Year 2010:

2010 ADJUSTMENTS 2010(Non GAAP)

Net sales $3,254.40 $3,254.40

Cost of goods ($1,812.20) ($1,812.20)

% of sales

Gross Profit $1,442.20 $1,442.20

SG &A ($1,012.50) 35 ($977.50)

Special Items ($21.30) 21.3 $0.00

Equity income $456.10 $456.10

Operating income $864.50 $920.80

Interest expense ($110.20) 35 ($145.20)

Interest income 10.8 10.8

Other income 43.9 43.9

Total other income ($90.50)

Income from cont operations $864.50 $830.30

Income tax benefit ($138.70) ($311.36)

Net Income from Cont. Operations $725.80 $518.94

Income from discontinued operations 39.6 39.6

Net income incl non cntrl interests $765.40 $558.54

Net income attributable to non cntrl

interests ($2.20) ($2.20)

Net income $763.20 $556.34

other comprehensive income 150 $706.34

Acquisition 19.8 $726.14

Net income( Non GAAP) $726.14


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Details of Adjustments:

Restructuring charges should be adjusted (excluded) in the IncomeStatement, as they are non-recurring. (Income Statement).

Asset impairment charges should be adjusted (excluded) in the IncomeStatement, as they are non-recurring. (Income Statement).

Unrealized gains or losses on marketable securities should be included inthe Income Statement.

After reading the footnotes we find that all of the above item s are a partof 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 partof MG&A, we add back rent expense to MG&A and include those paymentsin 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 $233.26

Shareholders equity 7647.9

ROE 3.05%

ROE(GAAP) 8.77%

ROA

Net income $233.26

Total assets 12423.8

ROA 1.88%

ROA(GAAP) 5.44%

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 ratioshowever are still positive and are not indicative or any flaw with the company.The other comprehensive income is something that fluctuates and will not harmthe company functioning adversely. So even with the adjusted ratios we canconclude 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 type of charge

Income tax payment 2011 non recurring $6.40

additional pension plan non recurring $21.00

Pending lawsuit non recurring $6.00

annual insurace payment recurring 0

sale of accounts recievable non recurring ($8.30)

outside consulting fees non recurring 0 30.1

restructuring charge non recurring $8.40

inventory buildup non recurring 9.7

Sustainable cash flow $909.90 $781.20

msf 506-final document

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