XTSE:TPX.B Molson Coors Canada Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o
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
Molson Coors Brewing Company
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
 
84-0178360
(I.R.S. Employer Identification No.)
1225 17th Street, Denver, Colorado, USA
1555 Notre Dame Street East, Montréal, Québec, Canada
(Address of principal executive offices)
 
80202
H2L 2R5
(Zip Code)
303-927-2337 (Colorado)
514-521-1786 (Québec)
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of May 3, 2012:
Class A Common Stock— 2,583,694 shares
Class B Common Stock—155,875,044 shares
Exchangeable shares:
As of May 3, 2012, the following number of exchangeable shares were outstanding for Molson Coors Canada, Inc.:
Class A Exchangeable shares—2,939,704 shares
Class B Exchangeable shares—19,260,784 shares
These Class A and Class B exchangeable shares offer substantially the same economic and voting rights as the respective classes of common shares of the registrant. The registrant has outstanding one share of special Class A voting stock, through which the holders of Class A exchangeable shares and Class B exchangeable shares of Molson Coors Canada Inc. (a subsidiary of the registrant), respectively, may exercise their voting rights with respect to the registrant. The special Class A and Class B voting stock are entitled to one vote for each of the exchangeable share classes, respectively, excluding shares held by the registrant or its subsidiaries, and generally vote together with the Class A common stock and Class B common stock, respectively, on all matters on which the Class A common stock and Class B common stock are entitled to vote. The trustee holder of the special Class A voting stock and the special Class B voting stock has the right to cast a number of votes equal to the number of then outstanding Class A exchangeable shares and Class B exchangeable shares, respectively.
 



MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


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 (the "Exchange Act"). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements, and include, but are not limited to, statements under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Outlook for 2012" relating to overall volume trends, consumer preferences, pricing trends, industry forces, cost reduction strategies, anticipated results, anticipated synergies, expectations for funding future capital expenditures and operations, debt service capabilities, shipment levels and profitability, market share and the sufficiency of capital resources. In addition, statements that we make in this report that are not statements of historical fact may also be forward- looking statements. Words such as "expects," "goals," "plans," "believes," "continues," "may," "anticipate," "seek," "estimate," "outlook," "trends," "future benefits," "strategies," and variations of such words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably). These risks and uncertainties include, but are not limited to those described under the heading "Risk Factors," elsewhere throughout this report, and those described from time to time in our past and future reports filed with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended December 31, 2011. Caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

3


PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

 MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
Sales
$
1,008.1

 
$
997.3

Excise taxes
(316.7
)
 
(306.9
)
Net sales
691.4

 
690.4

Cost of goods sold
(438.8
)
 
(427.2
)
Gross profit
252.6

 
263.2

Marketing, general and administrative expenses
(248.2
)
 
(238.4
)
Special items, net
(1.5
)
 

Equity income in MillerCoors
118.9

 
101.2

Operating income (loss)
121.8

 
126.0

Interest income (expense), net
(23.8
)
 
(26.8
)
Other income (expense), net
(1.4
)
 
(0.7
)
Income (loss) from continuing operations before income taxes
96.6

 
98.5

Income tax benefit (expense)
(17.3
)
 
(16.1
)
Net income (loss) from continuing operations
79.3

 
82.4

Income (loss) from discontinued operations, net of tax
0.1

 
0.3

Net income (loss) including noncontrolling interests
79.4

 
82.7

Less: Net (income) loss attributable to noncontrolling interests
0.1

 
0.2

Net income (loss) attributable to Molson Coors Brewing Company
$
79.5

 
$
82.9

Basic net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
From continuing operations
$
0.44

 
$
0.44

From discontinued operations

 

Basic net income per share
$
0.44

 
$
0.44

Diluted net income (loss) attributable to Molson Coors Brewing Company per share:
 
 
 
From continuing operations
$
0.44

 
$
0.44

From discontinued operations

 

Diluted net income per share
$
0.44

 
$
0.44

Weighted average shares—basic
180.3

 
186.9

Weighted average shares—diluted
181.7

 
188.7

Amounts attributable to Molson Coors Brewing Company
 
 
 
Net income (loss) from continuing operations
$
79.4

 
$
82.6

Income (loss) from discontinued operations, net of tax
0.1

 
0.3

Net income (loss) attributable to Molson Coors Brewing Company
$
79.5

 
$
82.9

See notes to unaudited condensed consolidated financial statements.
MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
(UNAUDITED)

 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
Net income (loss) including noncontrolling interests
$
79.4

 
$
82.7

Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments, net of tax
107.8

 
161.7

Amortization of net prior service costs and net actuarial losses, net of tax
9.9

 
0.9

Unrealized gain (loss) on derivative instruments, net of tax
(17.8
)
 
(7.5
)
Reclassification adjustment on derivative instruments, net of tax
1.8

 
2.5

Ownership share of unconsolidated subsidiaries' other comprehensive (loss) income, net of tax
9.4

 
12.9

Total other comprehensive (loss) income, net of tax
111.1

 
170.5

Comprehensive income (loss)
190.5

 
253.2

Less: Comprehensive income attributable to the noncontrolling interest
0.1

 
0.2

Comprehensive income (loss) attributable to MCBC
$
190.6

 
$
253.4

See notes to unaudited condensed consolidated financial statements.

MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)

 
As of
 
March 31, 2012
 
December 31, 2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
836.3

 
$
1,078.9

Accounts receivable, net
512.4

 
588.8

Other receivables, net
133.7

 
137.2

Inventories:
 
 
 
Finished, net
181.3

 
140.7

In process
19.0

 
15.3

Raw materials
46.7

 
41.8

Packaging materials, net
9.4

 
9.4

Total inventories, net
256.4

 
207.2

Other assets, net
108.7

 
94.0

Deferred tax assets
26.4

 
11.6

Discontinued operations
0.3

 
0.3

Total current assets
1,874.2

 
2,118.0

Properties, net
1,455.3

 
1,430.1

Goodwill
1,491.5

 
1,453.3

Other intangibles, net
4,682.8

 
4,586.0

Investment in MillerCoors
2,613.1

 
2,487.9

Deferred tax assets
128.5

 
149.9

Notes receivable, net
32.0

 
32.7

Other assets
158.8

 
165.9

Total assets
$
12,436.2

 
$
12,423.8

Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
205.6

 
$
301.2

Accrued expenses and other liabilities
612.0

 
646.8

Derivative hedging instruments
11.4

 
107.6

Deferred tax liabilities
169.1

 
161.3

Current portion of long-term debt and short-term borrowings
48.2

 
46.9

Discontinued operations
13.7

 
13.4

Total current liabilities
1,060.0

 
1,277.2

Long-term debt
1,950.4

 
1,914.9

Pension and post-retirement benefits
708.1

 
697.5

Derivative hedging instruments
222.6

 
212.5

Deferred tax liabilities
474.9

 
455.6

Unrecognized tax benefits
79.9

 
76.4

Other liabilities
70.0

 
77.5

Discontinued operations
22.4

 
22.0

Total liabilities
4,588.3

 
4,733.6

Commitments and contingencies (Note 15)


 


Molson Coors Brewing Company stockholders' equity
 
 
 
Capital stock:
 
 
 
Preferred stock, non-voting, no par value (authorized: 25.0 shares; none issued)

 

Class A common stock, voting, $0.01 par value per share (authorized: 500.0 shares; issued and outstanding: 2.6 shares at March 31, 2012 and December 31, 2011)

 

Class B common stock, non-voting, $0.01 par value per share (authorized: 500.0 shares; issued: 163.4 shares and 162.7 shares at March 31, 2012 and December 31, 2011, respectively)
1.6

 
1.6

Class A exchangeable shares, no par value (issued and outstanding: 2.9 shares at March 31, 2012 and December 31, 2011)
110.5

 
110.5

Class B exchangeable shares, no par value (issued and outstanding: 19.3 shares at March 31, 2012 and December 31, 2011)
724.8

 
724.8

Paid-in capital
3,598.7

 
3,572.1

Retained earnings
3,711.4

 
3,689.7

Accumulated other comprehensive income (loss)
(18.6
)
 
(129.7
)
Class B common stock held in treasury at cost (7.5 shares at March 31, 2012 and December 31, 2011)
(321.1
)
 
(321.1
)
Total Molson Coors Brewing Company stockholders' equity
7,807.3

 
7,647.9

Noncontrolling interests
40.6

 
42.3

Total equity
7,847.9

 
7,690.2

Total liabilities and equity
$
12,436.2

 
$
12,423.8

See notes to unaudited condensed consolidated financial statements.
MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
Cash flows from operating activities:
 
 
 
Net income (loss) including noncontrolling interests
$
79.4

 
$
82.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
53.4

 
51.0

Amortization of debt issuance costs and discounts
5.6

 
5.3

Share-based compensation
4.8

 
8.3

Loss on sale or impairment of properties and intangibles
1.0

 
2.2

Deferred income taxes
4.3

 
1.5

Equity income in MillerCoors
(118.9
)
 
(101.2
)
Distributions from MillerCoors
118.9

 
101.2

Equity in net income of other unconsolidated affiliates
(0.1
)
 
(3.2
)
Distributions from other unconsolidated affiliates
11.8

 
6.5

Excess tax benefits from share-based compensation
(3.3
)
 
(0.8
)
Change in current assets and liabilities and other
(106.4
)
 
(108.2
)
(Gain) loss from discontinued operations
(0.1
)
 
(0.3
)
Net cash provided by operating activities
50.4

 
45.0

Cash flows from investing activities:
 
 
 
Additions to properties
(33.8
)
 
(34.3
)
Proceeds from sales of properties and intangible assets
0.8

 
1.2

Acquisition of businesses, net of cash acquired

 
(29.4
)
Investment in MillerCoors
(236.0
)
 
(277.2
)
Return of capital from MillerCoors
124.6

 
177.5

Proceeds from settlements of derivative instruments

 
15.4

Payments on settlement of derivatives
(110.6
)
 

Investment in and advances to an unconsolidated affiliate
(4.6
)
 

Trade loan repayments from customers
3.8

 
3.7

Trade loans advanced to customers
(2.4
)
 
(2.6
)
Other

 
1.1

Net cash used in investing activities
(258.2
)
 
(144.6
)
Cash flows from financing activities:
 
 
 
Exercise of stock options under equity compensation plans
19.7

 
4.3

Excess tax benefits from share-based compensation
3.3

 
0.8

Dividends paid
(57.8
)
 
(52.1
)
Dividends paid to noncontrolling interests holders
(1.7
)
 

Payments on long-term debt and capital lease obligations
(0.1
)
 

Proceeds from short-term borrowings

 
6.8

Payments on short-term borrowings
(10.8
)
 

Net (payments) proceeds from revolving credit facilities
1.5

 
0.4

Change in overdraft balances and other

 
(10.3
)
Net cash used in financing activities
(45.9
)
 
(50.1
)
Cash and cash equivalents:
 
 
 
Net increase (decrease) in cash and cash equivalents
(253.7
)
 
(149.7
)
Effect of foreign exchange rate changes on cash and cash equivalents
11.1

 
13.8

Balance at beginning of year
1,078.9

 
1,217.6

Balance at end of period
$
836.3

 
$
1,081.7

See notes to unaudited condensed consolidated financial statements.

4


MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies
Unless otherwise noted in this report, any description of "we", "us" or "our" includes Molson Coors Brewing Company ("MCBC" or the "Company"), principally a holding company, and its subsidiaries: Molson Coors Canada ("MCC"), operating in Canada; MillerCoors LLC ("MillerCoors") which is accounted for by us under the equity method of accounting, operating in the United States ("U.S."); Molson Coors Brewing Company (UK) Limited ("MCBC-UK"), operating in the United Kingdom ("U.K.") and the Republic of Ireland; Molson Coors International ("MCI") operating in various other countries; and our other non-operating subsidiaries as further described in Note 1 of the Notes to the Audited Consolidated Financial Statements ("Notes") included in our Annual Report on Form 10-K for the year ended December 31, 2011 ("Annual Report").
Unless otherwise indicated, information in this report is presented in U.S. dollars ("USD" or "$").
The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments which are necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Such unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes included in our Annual Report. Our accounting policies did not change in the first quarter of 2012. The results of operations for the 13 week period ended March 31, 2012, are not necessarily indicative of the results that may be achieved for the full fiscal year.
We follow a 52/53 week fiscal reporting calendar. The first fiscal quarter of 2012 and 2011 consisted of the 13 weeks ended on March 31, 2012, and March 26, 2011, respectively. Fiscal year 2012 consists of the 52 weeks ending on December 29, 2012, and fiscal year 2011 consisted of the 53 weeks ended December 31, 2011.
Unless otherwise indicated, the first quarter of 2012 refers to the 13 weeks ended March 31, 2012, and the first quarter of 2011 refers to the 13 weeks ended March 26, 2011.
MillerCoors follows a monthly reporting calendar. The first quarter of 2012 refers to the three months ended March 31, 2012, and the first quarter of 2011 refers to the three months ended March 31, 2011.    
Consistent with the disclosure in the Annual Report, these significant accounting policies include our treatment of the allowance for credit losses on our MCBC-UK trade loan portfolio. This allowance is maintained to provide for loan losses deemed to be probable related to specifically identified loans and for losses in the loan portfolio that have been incurred at the balance sheet date. We establish our allowance through a provision for loan losses charged against earnings and recorded in Marketing, general & administrative expenses. Loan balances that are written off are recorded against the allowance as a write-off. A rollforward of the allowance for the quarters ended March 31, 2012, and March 26, 2011, is as follows (in millions):
 
As of
 
March 31, 2012
March 26, 2011
Balance at beginning of the year
$
6.2

$
9.1

Addition charged to expense, net of recoveries
1.4

0.9

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

0.3

Balance at end of first quarter
$
7.0

$
9.8

2. New Accounting Pronouncements
Adoption of New Accounting Pronouncements
Fair Value Measurement
In May 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to fair value measurement and disclosure requirements. The new guidance results in a consistent definition of fair value and convergence between U.S. GAAP and International Financial Reporting Standards ("IFRS") on both how to measure fair value and on what disclosures to provide about fair value measurements. The guidance was effective for our quarter ended March 31, 2012. The adoption of this guidance did not impact our financial position or results from operations.
Presentation of Other Comprehensive Income
In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income, which was later amended in December 2011. Upon adoption of the guidance, as amended, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective for our quarter ended March 31, 2012. The adoption of this guidance was limited to a change in the presentation of our results, which we have elected to include as a separate Condensed Consolidated Statement of Comprehensive Income.
Testing Goodwill for Impairment
In September 2011, the FASB issued authoritative guidance related to goodwill impairment testing. The new guidance permits an entity to first assess qualitative factors to whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for annual and interim goodwill impairment tests performed for our fiscal years beginning January 1, 2012. The impact of this guidance does not have an impact on our financial position or results from operations.
New Accounting Pronouncements Not Yet Adopted
Disclosure about Offsetting Assets and Liabilities
In December 2011, the FASB issued authoritative guidance enhancing the disclosure requirements related to offsetting asset and liability positions. The update creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to better facilitate comparison between financial statements prepared under U.S. GAAP and IFRS by requiring entities to provide financial statement users information about both gross and net exposures. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods thereafter. We do not anticipate that this guidance will have an impact on our financial position or results from operations. However, we are currently evaluating the impact of this guidance on our existing disclosures.

3. Segment Reporting
Our reporting segments are based on the key geographic regions in which we operate and consist of Canada, the United States ("U.S."), the United Kingdom ("U.K.") and Molson Coors International ("MCI"). Corporate is not a segment and includes interest and certain other general and administrative costs that are not allocated to any of the operating segments.
The following table sets forth net sales by segment:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Canada
$
402.3

 
$
393.8

U.K. 
263.4

 
274.7

MCI
28.1

 
21.6

Corporate
0.3

 
0.3

Eliminations(1)
(2.7
)
 

         Consolidated
$
691.4

 
$
690.4

(1)
Represents intersegment sales from the U.K. segment to the MCI segment.
Across each of our segments, no single customer accounted for more than 10% of our sales. Net sales represent sales to third-party external customers. Inter-segment sales revenues, other than sales to MillerCoors, are insignificant and eliminated in consolidation.
The following table sets forth income (loss) from continuing operations before income taxes by segment:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Canada
$
43.9

 
$
52.2

U.S. 
118.9

 
101.2

U.K. 
1.3

 
6.8

MCI
(8.6
)
 
(7.5
)
Corporate
(58.9
)
 
(54.2
)
         Consolidated
$
96.6

 
$
98.5

The following table sets forth total assets by segment:
 
As of
 
March 31, 2012
 
December 31, 2011
 
(In millions)
Canada
$
6,394.2

 
$
6,541.6

U.S. 
2,613.1

 
2,487.9

U.K. 
2,251.6

 
2,293.4

MCI
152.3

 
151.7

Corporate
1,024.7

 
948.9

Discontinued operations
0.3

 
0.3

         Consolidated
$
12,436.2

 
$
12,423.8


4. Investments
Our investments include both equity method and consolidated investments. Those entities identified as variable interest entities ("VIEs") have been evaluated to determine whether we are the primary beneficiary. The VIEs included under "Consolidated Investments" below are those for which we have concluded that we are the primary beneficiary and accordingly, we consolidate these entities. We have not provided any financial support to any of our VIEs during the quarter that we were not previously contractually obligated to provide. Authoritative guidance related to the consolidation of VIEs requires that we continually reassess whether we are the primary beneficiary of VIEs in which we have an interest. As such, the conclusion regarding the primary beneficiary status is subject to change and we continually evaluate circumstances that could require consolidation or deconsolidation.
Equity Investments
Investment in MillerCoors
Summarized financial information for MillerCoors is as follows (in millions):
Condensed Balance Sheets
 
As of
 
March 31, 2012
 
December 31, 2011
Current assets
$
997.4

 
$
810.9

Non-current assets
8,881.2

 
8,861.7

Total assets
$
9,878.6

 
$
9,672.6

Current liabilities
$
875.5

 
$
922.7

Non-current liabilities
1,421.9

 
1,471.3

Total liabilities
2,297.4

 
2,394.0

Noncontrolling interests
42.1

 
36.7

Owners' equity
7,539.1

 
7,241.9

Total liabilities and equity
$
9,878.6

 
$
9,672.6

Results of Operations
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
Net sales
$
1,759.8

 
$
1,699.1

Cost of goods sold
(1,070.0
)
 
(1,063.0
)
Gross profit
$
689.8

 
$
636.1

Operating income
$
279.0

 
$
238.7

Net income attributable to MillerCoors
$
275.3

 
$
234.7

The following represents MCBC's proportional share in net income attributable to MillerCoors reported under the equity method:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions, except percentages)
Net income attributable to MillerCoors
$
275.3

 
$
234.7

MCBC economic interest
42
%
 
42
%
MCBC proportionate share of MillerCoors net income
115.6

 
98.6

Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1)
0.4

 
2.4

Share-based compensation adjustment(2)
2.9

 
0.2

Equity income in MillerCoors
$
118.9

 
$
101.2

(1)
Our net investment in MillerCoors is based on the carrying values of the net assets contributed to the joint venture which is less than our proportional share of underlying equity (42%) of MillerCoors (contributed by both Coors Brewing Company ("CBC") and Miller Brewing Company ("Miller")) by approximately $588 million as of March 31, 2012. This difference, with the exception of goodwill and land, is being amortized as additional equity income over the remaining useful lives of the contributed long-lived amortizing assets. The current basis difference combined with the $35.0 million recorded in 2008 and 2009 related to differences resulting from accounting policy elections must be considered to reconcile MillerCoors equity to our investment in MillerCoors.
(2)
The net adjustment is to record all share-based compensation associated with pre-existing equity awards to be settled in Class B common stock held by former employees now employed by MillerCoors and to eliminate all share-based compensation impacts related to pre-existing SABMiller plc equity awards held by former Miller employees now employed by MillerCoors. As of the end of the second quarter of 2011, the share-based awards granted to former CBC employees now employed by MillerCoors became fully vested, as such; no further adjustments will be recorded related to these awards.
During the first quarter of 2012, we had $4.9 million of beer sales to MillerCoors and $2.3 million of beer purchases from MillerCoors. During the first quarter of 2011, we had $8.0 million of beer sales to MillerCoors and $2.5 million of beer purchases from MillerCoors. For the first quarter of 2012, we recorded $1.1 million of service agreement costs and other charges to MillerCoors and $0.2 million of service agreement costs from MillerCoors. For the first quarter of 2011, we recorded $1.4 million of service agreement and other charges to MillerCoors and $0.2 million of service agreement costs from MillerCoors.
As of March 31, 2012, and December 31, 2011, we had $7.0 million and $2.0 million of net receivables due from MillerCoors, respectively.
Consolidated Investments
The following summarizes the assets of our consolidated VIEs, including noncontrolling interests. None of our consolidated VIEs held debt as of March 31, 2012, or December 31, 2011.
 
As of
 
March 31, 2012
 
December 31, 2011
 
Total assets
 
(In millions)
Grolsch
$
22.9

 
$
20.4

Cobra U.K.
$
32.7

 
$
31.6

The following summarizes the results of operations of our consolidated VIEs (including noncontrolling interests).
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
Revenues
 
Pre-tax income
 
Revenues
 
Pre-tax income
 
(In millions)
Grolsch(1)
$
5.3

 
$
0.8

 
$
5.2

 
$
0.7

Cobra U.K.
$
8.2

 
$
0.4

 
$
8.3

 
$
1.0

(1)
Substantially all such sales for Grolsch are made to us and as such, are eliminated in consolidation.
5. Share-Based Payments
During the first quarters of 2012 and 2011, we recognized share-based compensation expense related to the following Class B common stock awards to certain directors, officers and other eligible employees, pursuant to the Molson Coors Brewing Company Incentive Compensation Plan ("Incentive Compensation Plan"): restricted stock units ("RSU"), deferred stock units ("DSU"), performance units ("PU"), stock options and stock-only stock appreciation rights ("SOSAR").
The following table summarizes components of the share-based compensation expense:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Stock options and SOSARs
 
 
 
Pre-tax compensation expense
$
1.8

 
$
2.8

Tax benefit
(0.5
)
 
(0.8
)
After-tax compensation expense
$
1.3

 
$
2.0

RSUs and DSUs
 
 
 
Pre-tax compensation expense
$
2.0

 
$
2.3

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

 
$
1.8

PUs
 
 
 
Pre-tax compensation expense
$
1.0

 
$
3.0

Tax benefit
(0.4
)
 
(0.9
)
After-tax compensation expense
$
0.6

 
$
2.1

Total after-tax compensation expense
$
3.3

 
$
5.9

During the first quarter of 2012, we granted 0.2 million stock options, 0.3 million RSUs and 0.7 million PUs, all of which were outstanding, other than an insignificant amount of cancellations, as of March 31, 2012.
The mark-to-market share-based compensation expense before tax, related to our share-based awards granted to former CBC employees now employed by MillerCoors, recorded during the first quarter of 2011, was a benefit of $0.2 million. We did not record an adjustment in the first quarter of 2012 as these awards were fully vested as of the end of the second quarter of 2011. No further adjustments will be recorded related to these awards. These amounts are included in the table above.
As of March 31, 2012, there was $34.5 million of total unrecognized pre-tax compensation expense related to non-vested shares from share-based compensation arrangements granted under the Incentive Compensation Plan. This compensation expense is expected to be recognized over a weighted-average period of approximately 1.6 years.
The following table represents the summary of stock options and SOSARs outstanding as of March 31, 2012, and the activity during the first quarter of 2012:
 
Outstanding
options
 
Weighted-average
exercise price per
share
 
Weighted-average
remaining
contractual life
(years)
 
Aggregate
intrinsic value
 
(In millions, except per share amounts and years)
Outstanding as of December 31, 2011
7.1
 
$38.69
 
4.31
 
$
43.1

Granted
0.2
 
$42.80
 
 
 
 
Exercised
(0.7)
 
$29.80
 
 
 
 
Forfeited
 
$43.53
 
 
 
 
Outstanding as of March 31, 2012
6.6
 
$39.70
 
4.59
 
$
42.8

Exercisable at March 31, 2012
5.6
 
$39.09
 
3.96
 
$
41.0

The total intrinsic value of options exercised during the first quarter of 2012 and 2011 was $9.4 million and $1.5 million, respectively. During the first quarter of 2012, cash received from stock option exercises was $19.7 million and the total net tax benefit to be realized for the tax deductions from these option exercises was $3.3 million.
The following table represents non-vested RSUs, DSUs and PUs as of March 31, 2012, and the activity during the first quarter of 2012:
 
RSUs and DSUs
 
PUs
 
Units
 
Weighted-average
grant date fair value
per unit
 
Units
 
Weighted-average
grant date fair value
per unit
 
(In millions, except
per unit amounts)
 
(In millions, except
per unit amounts)
Non-vested as of December 31, 2011
0.6

 
$43.35
 
2.0

 
$11.67
Granted
0.3

 
$42.80
 
0.7

 
$14.35
Vested

 
$43.31
 

 
$—
Forfeited

 
$43.26
 
(0.1
)
 
$11.05
Non-vested as of March 31, 2012
0.9

 
$43.19
 
2.6

 
$11.03
The fair value of each option granted in the first quarter of 2012 and 2011, respectively, was determined on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
Risk-free interest rate
1.56%
 
2.55%
Dividend yield
2.98%
 
2.52%
Volatility range
25.80%-27.56%
 
25.26%-28.11%
Weighted-average volatility
25.84%
 
26.37%
Expected term (years)
4.0-7.7
 
4.0-7.7
Weighted-average fair market value
$8.18
 
$9.66
The risk-free interest rates utilized for periods throughout the contractual life of the options are based on a zero-coupon U.S. Treasury security yield at the time of grant. Expected volatility is based on historical volatility of our stock. The expected term of options is estimated based upon observations of historical employee option exercise patterns and trends. The range on the expected term results from separate groups of employees who exhibit different historical exercise behavior.
As of March 31, 2012, there were 3.2 million shares of our Class B common stock available for the issuance of stock options, SOSARs, RSUs, DSUs, PUs and performance share units under the Incentive Compensation Plan.

6. Special Items
We have incurred charges or recognized gains that we believe are not indicative of our normal, core operations. As such, we have separately classified these amounts as special operating items.
Summary of Special Items
The table below summarizes special items recorded by segment:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Employee related charges
 
 
 
Restructuring
 
 
 
Canada
$
1.6

 
$

U.K.
1.8

 
0.3

Corporate
1.1

 

Special termination benefits
 
 
 
Canada(1)
0.5

 
2.8

Unusual or infrequent items
 
 
 
Canada - Flood insurance reimbursement(2)

 
(0.6
)
U.K. - Release of non-income-related tax reserve(3)
(3.5
)
 
(2.5
)
Total Special items, net
$
1.5

 
$

(1)
During the first quarters of 2012 and 2011, we recognized charges related to special termination benefits as eligible employees elected early retirement offered as a result of the Montreal Brewery and Distribution group's ratification of a Collective Bargaining Agreement with MCC in the first quarter of 2011.     
(2)
During 2011, we incurred expenses related to flood damages at our Toronto offices, which was partially offset by insurance proceeds.
(3)
During 2009, we established a non-income-related tax reserve of $10.4 million that was recorded as a Special item. Our estimates indicated a range of possible loss relative to this reserve of zero to $22.3 million, inclusive of potential penalties and interest. The amounts recorded in 2012 and 2011 represent a release of a portion of this reserve as a result of a change in estimate.
The table below summarizes the activity in the restructuring accruals:
 
Restructuring charges
 
Canada
 
U.K.
 
Corporate
 
Total
 
(In millions)
Balance at December 31, 2011
$
0.1

 
$
1.8

 
$

 
$
1.9

Charges incurred
1.6

 
1.8

 
1.1

 
4.5

Payments made

 
(1.1
)
 

 
(1.1
)
Foreign currency and other adjustments
(0.1
)
 
(0.3
)
 

 
(0.4
)
Balance at March 31, 2012
$
1.6

 
$
2.2

 
$
1.1

 
$
4.9


7. Other Income and Expense
The table below summarizes other income and expense:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Gain (loss) from Foster's total return swap and related financial instruments(1)
$

 
$
0.8

Gain (loss) from other foreign exchange and derivative activity
(1.7
)
 
(0.7
)
Environmental reserve

 
(0.2
)
Other, net
0.3

 
(0.6
)
Other income (expense), net
$
(1.4
)
 
$
(0.7
)
(1)
During January 2011, we settled our remaining Foster's Group Limited's ("Fosters") total return swap and related financial instruments.
8. Discontinued Operations
In 2006, we sold our entire equity interest in our Brazilian unit, Cervejarias Kaiser Brasil S.A. ("Kaiser") to FEMSA Cerveza S.A. de C.V. ("FEMSA"). The terms of the sale agreement require us to indemnify FEMSA for exposures related to certain tax, civil and labor contingencies arising prior to FEMSA's purchase of Kaiser. In the first quarters of 2012 and 2011, we recognized gains of $0.1 million and $0.3 million, respectively, from discontinued operations associated with foreign exchange gains and losses related to indemnities we provided to FEMSA with regard to contingent tax and other liabilities. See further discussion in Note 15, "Commitments and Contingencies".
As of March 31, 2012, and December 31, 2011, included in current assets of discontinued operations on the balance sheet are $0.3 million of deferred tax assets associated with these indemnity liabilities. Current liabilities of discontinued operations include current legal reserves of $4.9 million and $4.8 million as of March 31, 2012 and December 31, 2011, respectively.
9. Income Tax
Our effective tax rates for the first quarters of 2012 and 2011 were approximately 18% and 16%, respectively.
Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled. There are proposed or pending tax law changes in the U.S., U.K. and Canada that, if enacted, may impact our effective tax rate.
As of December 31, 2011, we had $70.7 million of uncertain tax benefits. Since December 31, 2011, uncertain tax benefits increased by $5.6 million. This addition is net of increases due to additional uncertain tax benefits and interest accrued for the current year and decreases primarily due to fluctuation in foreign exchange rates, certain tax positions closing or being effectively settled, and payments made to tax authorities with regard to uncertain tax benefits during the first quarter of 2012. This results in a total uncertain tax benefit of $76.3 million as of March 31, 2012.
We file income tax returns in most of the federal, state, and provincial jurisdictions in the U.S., U.K., and Canada. Tax years through 2006 are closed in the U.S., while exam years 2007 and 2008 have been effectively settled and only remain open pending finalization of an advanced pricing agreement. Tax years through fiscal year ended 2006 are closed or have been effectively settled through examination in Canada. Tax years through 2008 are closed or have been effectively settled through examination in the U.K.
10. Earnings Per Share ("EPS")
Basic net income per share was computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the additional dilutive effect of our potentially dilutive securities, which include stock options, SOSARs, RSUs, PUs, and DSUs. The dilutive effects of our potentially dilutive securities are calculated using the treasury stock method. Diluted income per share could also be impacted by our convertible debt and related warrants outstanding if they were in the money.
The following summarizes the effect of dilutive securities on diluted EPS:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Amounts attributable to MCBC
 
 
 
Net income (loss) from continuing operations
$
79.4

 
$
82.6

Income (loss) from discontinued operations, net of tax
0.1

 
0.3

Net income (loss) attributable to MCBC
$
79.5

 
$
82.9

Weighted average shares for basic EPS
180.3

 
186.9

Effect of dilutive securities:
 
 
 
Options and SOSARs
0.8

 
1.0

RSUs, PUs and DSUs
0.6

 
0.8

Weighted average shares for diluted EPS
181.7

 
188.7

Basic net income (loss) per share:
 
 
 
Continuing operations attributable to MCBC
$
0.44

 
$
0.44

Discontinued operations attributable to MCBC

 

Net income attributable to MCBC
$
0.44

 
$
0.44

Diluted net income (loss) per share:
 
 
 
Continuing operations attributable to MCBC
$
0.44

 
$
0.44

Discontinued operations attributable to MCBC

 

Net income attributable to MCBC
$
0.44

 
$
0.44

Dividends declared and paid per share
$
0.32

 
$
0.28

The following anti-dilutive securities were excluded from the computation of the effect of dilutive securities on diluted earnings per share:
 
Thirteen Weeks Ended
 
March 31, 2012
 
March 26, 2011
 
(In millions)
Stock options, SOSARs and RSUs(1)
0.8

 
0.4

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

 
10.5

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

 
10.5

 
22.6

 
21.4

(1)
Exercise prices exceed the average market price of the common shares or are anti-dilutive due to the impact of the unrecognized compensation cost on the calculation of assumed proceeds in the application of the treasury stock method.
(2)
We issued $575 million of senior convertible notes in June 2007. The impact of a net share settlement of the conversion amount at maturity will begin to dilute earnings per share if and when our stock price reaches $52.79. The impact of stock that could be issued to settle share obligations we could have under the warrants we issued simultaneously with the convertible notes issuance will begin to dilute earnings per share when our stock price reaches $67.57. The potential receipt of MCBC stock from counterparties under our purchased call options when and if our stock price is between $52.79 and $67.57 would be anti-dilutive and excluded from any calculations of earnings per share.
We have no outstanding equity share awards that contain non-forfeitable rights to dividends on unvested shares.

11. Goodwill and Intangible Assets
The following summarizes the change in goodwill for the first quarter of 2012 (in millions):
Balance at December 31, 2011
$
1,453.3

Business acquisitions

Foreign currency translation
37.8

Purchase price adjustment
0.4

Balance at March 31, 2012
$
1,491.5

Goodwill was attributed to our segments as follows:
 
As of
 
March 31, 2012
 
December 31, 2011
 
(In millions)
Canada
$
705.0

 
$
689.5

United Kingdom
768.1

 
746.1

MCI
18.4

 
17.7

Consolidated
$
1,491.5

 
$
1,453.3

The following table presents details of our intangible assets, other than goodwill, as of March 31, 2012:
 
Useful life
 
Gross
 
Accumulated
amortization
 
Net
 
(Years)
 
(In millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Brands
 3 - 40
 
$
326.0

 
$
(188.4
)
 
$
137.6

Distribution rights
 2 - 23
 
350.0

 
(243.2
)
 
106.8

Patents and technology and distribution channels
 3 - 10
 
35.0

 
(30.6
)
 
4.4

Land use rights and other
 2 - 42
 
6.5

 
(0.9
)
 
5.6

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Brands
 Indefinite
 
3,399.9

 

 
3,399.9

Distribution networks
 Indefinite
 
1,012.9

 

 
1,012.9

Other
 Indefinite
 
15.6

 

 
15.6

Total
 
 
$
5,145.9

 
$
(463.1
)
 
$
4,682.8


The following table presents details of our intangible assets, other than goodwill, as of December 31, 2011:
 
Useful life
 
Gross
 
Accumulated
amortization
 
Net
 
(Years)
 
(In millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
Brands
3 - 40
 
$
316.9

 
$
(179.0
)
 
$
137.9

Distribution rights
2 - 23
 
342.0

 
(234.0
)
 
108.0

Patents and technology and distribution channels
3 - 10
 
34.9

 
(28.9
)
 
6.0

Land use rights and other
2 - 42
 
6.5

 
(0.8
)
 
5.7

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Brands
Indefinite
 
3,322.4

 

 
3,322.4

Distribution networks
Indefinite
 
990.5

 

 
990.5

Other
Indefinite
 
15.5

 

 
15.5

Total
 
 
$
5,028.7

 
$
(442.7
)
 
$
4,586.0

The changes in the gross carrying amounts of intangibles from December 31, 2011, to March 31, 2012, are due to the impact of foreign exchange rates, as a significant amount of intangibles are denominated in foreign currencies.
Based on foreign exchange rates as of March 31, 2012, the following is our estimated amortization expense related to intangible assets for the next five years:
 
Amount
 
(In millions)
2012 - remaining
$
26.3

2013
$
34.8

2014
$
34.7

2015
$
32.1

2016
$
32.1

Amortization expense of intangible assets was $9.3 million and $9.8 million for the first quarter of 2012 and 2011, respectively.
We are required to perform goodwill and indefinite-lived intangible asset impairment tests on at least an annual basis and more frequently in certain circumstances. We performed the required annual impairment testing as of June 26, 2011, and determined that there were no impairments of goodwill or other indefinite-lived intangible assets.

Through our annual impairment testing in 2011, we determined that the fair value of our China reporting unit, included in MCI, was not significantly in excess of its carrying value (of which $9.6 million is goodwill as of March 31, 2012). Since its inception, the performance of MC Si'hai (included in our China reporting unit) has not met our expectations due to delays in executing our business plans. As a result, the fair value of our China reporting unit only exceeded its carrying value by 4%. We continue to work at resolving the delays in executing our business plans, including ongoing discussions with the JV partner intended to overcome these difficulties. While there have not been events or changes in circumstances since our annual impairment testing in 2011 that would more likely than not reduce the China reporting unit fair value below its carrying value, we will continue to monitor the progress of these negotiations and discussions with our JV partner. There is no assurance that our efforts will be successful and, as a result, we may be required to record a goodwill impairment charge in the future related to the China reporting unit of up to $9.6 million.

Regarding definite-lived intangibles, we continuously monitor the performance of the underlying asset for potential triggering events suggesting an impairment review should be performed. No such triggering events were identified in the first quarter of 2012.

12. Debt
Our total long-term borrowings as of March 31, 2012, and December 31, 2011, were composed of the following:
 
As of
 
March 31, 2012
 
December 31, 2011
 
(In millions)
Senior notes:
 
 
 
$850 million 6.375% notes due 2012
$
44.6

 
$
44.6

Canadian Dollar ("CAD") 900 million 5.0% notes due 2015
901.2

 
881.2

$575 million 2.5% convertible notes due 2013(1)(2)
575.0

 
575.0

CAD 500 million 3.95% Series A notes due 2017
500.7

 
489.6

Credit facility(3)

 

Less: unamortized debt discounts and other(2)
(26.5
)
 
(30.8
)
Total long-term debt (including current portion)
1,995.0

 
1,959.6

Less: current portion of long-term debt
(44.6
)
 
(44.7
)
Total long-term debt
$
1,950.4

 
$
1,914.9

Total fair value(4)
$
2,126.1

 
$
2,133.6

(1)
The original conversion price for each $1,000 aggregate principal amount of notes was $54.76 per share of our Class B common stock, which represented a 25% premium above the stock price on the day of issuance of the notes and corresponded to the initial conversion ratio of 18.263 shares per each $1,000 aggregate principal amount of notes. The conversion ratio and conversion price are subject to adjustments for certain events and provisions, as defined in the indenture. As of March 2012, our conversion price and ratio are $52.79 and 18.9441 shares, respectively. Currently, the convertible debt's if-converted value does not exceed the principal.
(2)
During the first quarters of 2012 and 2011, we incurred additional non-cash interest expense of $4.5 million and $4.3 million, respectively. We also incurred interest expense related to the 2.5% convertible coupon rate of $3.7 million during the first quarter of 2012, and $3.6 million during the first quarter of 2011. The combination of non-cash and cash interest resulted in an effective interest rate of 5.91% and 5.97% for the first quarters of 2012 and 2011, respectively. In relation to this issuance, paid in capital in the equity section of our balance sheet includes $103.9 million, ($64.2 million net of tax), representing the equity component of the convertible debt. Further, as of March 31, 2012, and December 31, 2011, $24.4 million and $28.9 million, respectively, of the unamortized debt discount and other balance relates to our $575 million convertible debt. We expect to record additional non-cash interest expense of approximately $14 million in 2012 and $11 million in 2013, thereby increasing the carrying value of the convertible debt to its $575 million face value at maturity in July 2013. The remaining $2.1 million and $1.9 million as of March 31, 2012, and December 31, 2011, respectively, relates to unamortized debt premiums, discounts, and other on the additional debt balances.
(3)
During the second quarter of 2011, we terminated our $750 million revolving multicurrency bank credit facility, which was scheduled to expire in August 2011. Additionally, in connection with this termination, we entered into an agreement for a 4-year revolving multicurrency credit facility of $400 million, which provides a $100 million sub-facility available for the issuance of letters of credit. We incurred $2.2 million of issuance costs and up-front fees related to this agreement, which are being amortized over the term of the facility. There were no outstanding borrowings on the $400 million credit facility as of March 31, 2012.
(4)
We utilize market approaches to estimate the fair value of our outstanding long-term borrowings by discounting anticipated future cash flows derived from the contractual terms of the obligations and observable market interest and foreign exchange rates. As of March 31, 2012, and December 31, 2011, the fair value of our outstanding long-term debt was $2,126.1 million and $2,133.6 million, respectively. Our convertible notes are valued based on quoted prices in active markets and would be classified as Level 1 in the fair value hierarchy. These notes had a fair value of $603.2 million and $608.5 million, as of March 31, 2012 and December 31, 2011, respectively. All other debt is valued based on significant other observable inputs and would be classified as Level 2 in the fair value hierarchy. These instruments had a fair value of $1,522.9 million and $1,525.1 million, as of March 31, 2012 and December 31, 2011, respectively.
Our short-term borrowings at March 31, 2012, and December 31, 2011, were $3.6 million and $2.2 million, respectively.
Under the terms of some of our debt facilities, we must comply with certain restrictions. These include restrictions on priority indebtedness (certain threshold percentages of secured consolidated net tangible assets), leverage thresholds, liens, and restrictions on certain types of sale lease-back transactions. As of March 31, 2012, we were in compliance with all of these restrictions.
On April 3, 2012, we entered into a sale and purchase agreement to purchase all of the issued share capital of StarBev Holdings S.à r.l. (including its subsidiaries, "StarBev"). In connection with the obligation to pay the purchase price, we have entered into new credit arrangements and issued new senior notes. See further discussion in Note 17, "Subsequent Events."
13. Derivative Instruments and Hedging Activities
Our risk management and derivative accounting policies are presented in Notes 1 and 18 of the Notes included in our Annual Report and did not significantly change during the first quarter of 2012.
Significant Derivative/Hedge Positions
Cross Currency Swaps
We historically designated the cross currency swap contracts as cash flow hedges of the variability of cash flows related to British Pound ("GBP") denominated principal and interest payments on intercompany notes of GBP 530 million. In September 2011, we cash settled approximately 25% of our GBP 530 million/$774 million and CAD 1.2 billion/GBP 530 million cross currency swaps. As a result of the settlement, we extinguished $98.7 million of the outstanding liability. Simultaneously with the settlement of the swaps, we paid down an equal portion of the outstanding principal of the intercompany notes in the amount of GBP 132 million.
In October 2011, we simultaneously extended both the terms of approximately half of the original intercompany notes and cross currency swaps, such that the new maturities are March 2014. The remaining approximate 25% was left unadjusted and continued to be due in May 2012. Following this extension, in November 2011, we dedesignated all of the remaining swaps as cash flow hedges and designated the aggregate swaps as a net investment hedge of our Canadian business.
In March 2012, we cash settled the remaining approximate 25% of our original cross currency swaps that was not refinanced in October 2011 as discussed above. As a result of the settlement, we extinguished $110.6 million of the outstanding liability, resulting in a net liability of $220.1 million classified as non-current at March 31, 2012.
Derivative Fair Value Measurements
We utilize market approaches to estimate the fair value of our derivative instruments by discounting anticipated future cash flows derived from the derivative's contractual terms and observable market interest, foreign exchange and commodity rates. The fair values of our derivatives also include credit risk adjustments to account for our counterparties' credit risk, as well as our own non-performance risk. As of March 31, 2012, and December 31, 2011, these adjustments resulted in deferred net gains in AOCI of $1.1 million and $1.1 million, respectively, as the fair value of our derivatives were in net liability positions at both period ends.
The table below summarizes our derivative assets and liabilities that were measured at fair value as of March 31, 2012, and December 31, 2011.
 
 
 
March 31, 2012
 
Total at
March 31, 2012
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs (Level 3)
 
(In millions)
Cross currency swaps
$
(220.1
)
 
$

 
$
(220.1
)
 
$

Foreign currency forwards
(4.4
)
 

 
(4.4
)
 

Commodity swaps
(5.3
)
 

 
(5.3
)
 

Total
$
(229.8
)
 
$

 
$
(229.8
)
 
$

 
 
 
 
December 31, 2011
 
Total at
December 31, 2011
 
Quoted prices in
active markets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable
inputs (Level 3)
 
(In millions)
Cross currency swaps
$
(311.9
)
 
$

 
$
(311.9
)
 
$

Foreign currency forwards
2.2

 

 
2.2

 

Commodity swaps
(6.9
)
 

 
(6.9
)
 

Total
$
(316.6
)
 
$

 
$
(316.6
)
 
$

During 2011, we settled all of our option contracts that were classified as Level 3. As of March 31, 2012, we had no significant transfers between Level 1 and 2. New derivative contracts transacted during the first quarter of 2012 are all included in Level 2.
Results of Period Derivative Activity
The tables below include the year to date results of our derivative activity in the Condensed Consolidated Balance Sheets as of March 31, 2012, and December 31, 2011, and the Condensed Consolidated Statements of Operations for the quarters ended March 31, 2012, and March 26, 2011.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheet (in millions, except for certain commodity swaps with notional amounts measured in Metric Tonnes, as noted)
 
March 31, 2012
 
 
 
 
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Cross currency swaps
CAD
601.3
 
Other current assets
 
$

 
Current derivative hedging instruments
 
$

 
 
 
 
Other assets
 

 
Long term derivative hedging instruments
 
(220.1
)
Foreign currency forwards
USD
440.2
 
Other current assets
 
1.5

 
Current derivative hedging instruments
 
(6.0
)
 
 
 
 
Other assets
 
2.1

 
Long term derivative hedging instruments
 
(2.0
)
Commodity swaps
Gigajoules
1.3

 
Other current assets
 
0.5

 
Current derivative hedging instruments
 
(1.4
)
 
 
 
 
Other assets
 
0.1

 
Long term derivative hedging instruments
 
(0.3
)
Total derivatives designated as hedging instruments
 
 
 
 
$
4.2

 
 
 
$
(229.8
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Aluminum swaps
Metric tonnes (actual)
7,750.0

 
Other current assets
 
$

 
Current derivative hedging instruments
 
$
(3.4
)
 
 
 
 
Other assets
 

 
Long term derivative hedging instruments
 

Diesel swaps
Metric tonnes (actual)
8,050.0

 
Other current assets
 

 
Current derivative hedging instruments
 
(0.6
)
 
 
 
 
Other assets
 

 
Long term derivative hedging instruments
 
(0.2
)
Total derivatives not designated as hedging instruments
 
 
 
 
$

 
 
 
$
(4.2
)

 
December 31, 2011
 
 
 
 
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Balance sheet location
 
Fair value
 
Balance sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Cross currency swaps
CAD
901.3
 
Other current assets
 
$

 
Current derivative hedging instruments
 
$
(103.2
)
 
 
 
 
Other assets
 

 
Long term derivative hedging instruments
 
(208.7
)
Foreign currency forwards
USD
464.6
 
Other current assets
 

 
Current derivative hedging instruments
 
(1.3
)
 
 
 
 
Other assets
 
3.4

 
Long term derivative hedging instruments
 

Commodity swaps
Gigajoules
2.2
 
Other current assets
 

 
Current derivative hedging instruments
 
(1.8
)
 
 
 
 
Other assets
 

 
Long term derivative hedging instruments
 
(0.5
)
Total derivatives designated as hedging instruments
 
 
 
 
$
3.4

 
 
 
$
(315.5
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Aluminum swaps
Metric tonnes (actual)
8,825.0

 
Other current assets
 
$

 
Current derivative hedging instruments
 
$
(1.3
)
 
 

 
Other assets
 

 
Long term derivative hedging instruments
 
(3.3
)
Diesel swaps
Metric tonnes (actual)
9,668.0

 
Other current assets
 
0.1

 
Current derivative hedging instruments
 

Total derivatives not designated as hedging instruments
 
 
 
 
$
0.1

 
 
 
$
(4.6
)
MCBC allocates the current and non-current portion of each contract to the corresponding derivative account above.
The following summarizes the change in derivative related Accumulated other comprehensive income within the Condensed Consolidated Balance Sheet for the first quarter of 2012 (in millions):
Balance at December 31, 2011
$
1.7

Unrealized gain (loss) on derivative instruments
(27.2
)
Reclassification adjustment on derivative instruments
2.4

Tax benefit (expense)
8.8

Balance at March 31, 2012
$
(14.3
)
 
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations (in millions)
For the Thirteen Weeks Ended March 31, 2012
Derivatives in cash flow hedge relationships
 
Amount of gain
(loss) recognized
in OCI on
derivative
(effective
portion)
 
Location of gain (loss)
reclassified from AOCI into
income (effective portion)
 
Amount of gain
(loss) recognized
from AOCI on
derivative
(effective portion)
 
Location of gain (loss)
recognized in income on
derivative (ineffective portion
and amount excluded from
effectiveness testing)
 
Amount of gain (loss)
recognized in income
on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
Forward starting interest rate swaps
 

 
Interest expense, net
 
(0.4
)
 
Interest expense, net
 

Foreign currency forwards
 
8.0

 
Other income (expense), net
 
(0.6
)
 
Other income (expense), net
 

 
 
 

 
Cost of goods sold
 
(1.1
)
 
Cost of goods sold
 

Commodity swaps
 
(1.3
)
 
Cost of goods sold
 
(0.3
)
 
Cost of goods sold
 

Total
 
$
6.7

 
 
 
$
(2.4
)
 
 
 
$

For the Thirteen Weeks Ended March 31, 2012
Derivatives in net investment hedge relationships
 
Amount of gain
(loss) recognized
in OCI on
derivative
(effective
portion)
 
Location of gain (loss)
reclassified from AOCI into
income (effective portion)
 
Amount of gain
(loss) recognized
from AOCI on
derivative
(effective portion)
 
Location of gain (loss)
recognized in income on
derivative (ineffective portion
and amount excluded from
effectiveness testing)
 
Amount of gain (loss)
recognized in income
on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
Cross currency contracts
 
$
20.5

 
Other income (expense), net
 
$

 
Other income (expense), net
 
$

Total
 
$
20.5

 
 
 
$

 
 
 
$

Note: Amounts recognized in AOCI related to cash flow and net investment hedges are presented gross of taxes
During the period we recorded no significant ineffectiveness related to these cash flow and net investment hedges.
For the Thirteen Weeks Ended March 26, 2011
Derivatives in cash flow hedge relationships
 
Amount of gain
(loss) recognized
in OCI on
derivative
(effective
portion)
 
Location of gain (loss)
reclassified from AOCI into
income (effective portion)
 
Amount of gain
(loss) recognized
from AOCI on
derivative
(effective portion)
 
Location of gain (loss)
recognized in income on
derivative (ineffective portion
and amount excluded from
effectiveness testing)
 
Amount of gain (loss)
recognized in income
on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
Cross currency swaps(1)
 
$
(3.1
)
 
Other income (expense), net
 
$
(23.5
)
 
Other income (expense), net
 
$

 
 
 

 
Interest expense, net
 
(3.4
)
 
Interest expense, net
 

Forward starting interest rate swaps
 
0.3

 
Interest expense, net
 
(0.3
)
 
Interest expense, net
 

Foreign currency forwards
 
(8.7
)
 
Other income (expense), net
 
(1.7
)
 
Other income (expense), net
 

 
 
 

 
Cost of goods sold
 
(2.4
)
 
Cost of goods sold
 

Commodity swaps
 
3.9

 
Cost of goods sold
 
0.2

 
Cost of goods sold
 

Total
 
$
(7.6
)
 
 
 
$
(31.1
)
 
 
 
$

Note: Amounts recognized in AOCI are presented gross of taxes
(1)
The foreign exchange gain (loss) component of these cross currency swaps is offset by the corresponding gain (loss) on the hedged forecasted transactions in Other income (expense), net and Interest expense, net.
During the period we recorded no significant ineffectiveness related to these cash flow hedges.
We expect net losses of approximately $5.8 million (pre-tax) recorded in AOCI at March 31, 2012 will be reclassified into earnings within the next 12 months. The maximum length of time over which forecasted transactions are hedged is three years, and such transactions relate to foreign exchange, interest rate and commodity exposures.
Other Derivatives (in millions)
For the Thirteen Weeks Ended March 31, 2012
Derivatives Not In Hedging Relationship
 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative
Commodity swaps
 
Cost of goods sold
 
$
0.1

 
 
 
 
$
0.1

For the Thirteen Weeks Ended March 26, 2011
Derivatives Not In Hedging Relationship
 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative
Cash settled total return swaps
 
Other income (expense), net
 
$
(0.6
)
Option contracts
 
Other income (expense), net
 
1.5

Foreign currency forwards
 
Other income (expense), net
 
(0.1
)
 
 
 
 
$
0.8


14. Pension and Other Postretirement Benefits
We sponsor defined benefit retirement plans in Canada and the U.K. Additionally, we offer other postretirement benefits to the majority of our Canadian and U.S. employees. The net periodic pension costs under retirement plans and other postretirement benefits were as follows:
 
Thirteen Weeks Ended March 31, 2012
 
Canada plans
 
U.S. plans
 
U.K. plan
 
MCI
 
Consolidated
 
(In millions)
Defined Benefit Plans
 
 
 
 
 
 
 
 
 
Service cost
$
4.1

 
$

 
$

 
$
0.1

 
$
4.2

Interest cost
16.6

 

 
24.5

 

 
41.1

Expected return on plan assets
(15.3
)
 

 
(28.2
)
 

 
(43.5
)
Amortization of prior service cost
0.2

 

 

 

 
0.2

Amortization of net actuarial loss
5.4

 

 
4.4

 

 
9.8

Less expected participant contributions
(0.4
)
 

 

 

 
(0.4
)
Net periodic pension cost (benefit)
$
10.6

 
$

 
$
0.7

 
$
0.1

 
$
11.4

Other Postretirement Benefits
 
 
 
 
 
 
 
 
 
Service cost—benefits earned during the period
$
0.6

 
$
0.1

 
$

 
$

 
$
0.7

Interest cost on projected benefit obligation
2.0

 

 

 

 
2.0

Amortization of prior service cost (gain)
(0.9
)
 

 

 

 
(0.9
)
Amortization of net actuarial loss (gain)
(0.1
)
 

 

 

 
(0.1
)
Net periodic postretirement benefit cost
$
1.6

 
$
0.1

 
$

 
$

 
$
1.7

 
Thirteen Weeks Ended March 26, 2011
 
Canada plans
 
U.S. plans
 
U.K. plan
 
MCI
 
Consolidated
 
(In millions)
Defined Benefit Plans
 
 
 
 
 
 
 
 
 
Service cost
$
4.7

 
$

 
$

 
$

 
$
4.7

Interest cost
18.1

 
0.1

 
26.9

 

 
45.1

Expected return on plan assets
(18.6
)
 

 
(31.2
)
 

 
(49.8
)
Amortization of prior service cost
0.2

 

 

 

 
0.2

Amortization of net actuarial loss
2.3

 

 
2.7

 

 
5.0

Less expected participant contributions
(0.4
)
 

 

 

 
(0.4
)
Special termination of benefits