filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT
The preparation, integrity and objectivity of the financial statements and all other financial information included in this annual report are the responsibility of the management of Molson Coors Beverage Company. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States, applying estimates based on management's best judgment where necessary. Management believes that all material uncertainties have been appropriately accounted for and disclosed.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the framework and criteria established in Internal Control—Integrated Framework (2013 Framework), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon its assessment, management concluded that, as of December 31, 2019, the Company's internal control over financial reporting was effective.
PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, provides an objective, independent audit of the consolidated financial statements and internal control over financial reporting. Their accompanying report is based upon an examination conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), including tests of accounting procedures, records and internal control.
The Board of Directors, operating through its Audit Committee composed of independent, outside directors, monitors the Company's accounting control systems and reviews the results of the Company's auditing activities. The Audit Committee meets at least quarterly, either separately or jointly, with representatives of management, PricewaterhouseCoopers LLP, and internal auditors. To ensure complete independence, PricewaterhouseCoopers LLP and the Company's internal auditors have full and free access to the Audit Committee and may meet with or without the presence of management.
| /s/ GAVIN D.K. HATTERSLEY | /s/ TRACEY I. JOUBERT | |
| Gavin D.K. Hattersley | Tracey I. Joubert | |
| President & Chief Executive Officer | Chief Financial Officer | |
| Molson Coors Beverage Company | Molson Coors Beverage Company | |
| February 12, 2020 | February 12, 2020 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Molson Coors Beverage Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Molson Coors Beverage Company and its subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and noncontrolling interests and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under Item 15(c) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessments for the Europe and Canada Reporting Units
As described in Notes 1 and 10 to the consolidated financial statements, the Company’s balance related to goodwill in the Europe and Canada reporting units as of December 31, 2019 is $1,484.8 million and $218.1 million, respectively. The carrying value of goodwill is evaluated for impairment at the reporting unit level at least annually or when an interim triggering event occurs that would indicate that impairment may have taken place. The Company’s annual impairment tests are performed as of the first day of the fiscal fourth quarter; however management identified a triggering event requiring an interim impairment assessment of the goodwill within the Canada reporting unit at the end of the third quarter of 2019, which resulted in a goodwill impairment loss of $668.3 million. As disclosed by management, a combination of discounted cash flow analyses and market approaches are used to determine the fair value of each reporting unit. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of management’s reporting units may include such items as (i) a decrease in expected future cash flows, specifically, a decrease in sales volume and increase in costs that could significantly impact management’s immediate and long-range results, (ii) prolonged weakening of economic conditions, or (iii) significant unfavorable changes in tax, environmental or other regulations, including interpretations thereof, terminal growth rates, market multiples and / or weighted average cost of capital utilized in the discounted cash flow analyses.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for the Europe and Canada reporting units is a critical audit matter are as follows. There was significant judgment by management when developing the fair value measurements. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing our procedures to evaluate the fair value estimates of the goodwill and the significant assumptions, including the revenue growth rates and terminal growth rate for the Europe reporting unit and the discount rate, revenue growth rates, market multiples and terminal growth rate for the Canada reporting unit. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments for the Europe and Canada reporting units, including controls over the valuation. These procedures also included, among others (i) testing management’s process for determining the fair value of goodwill for the Europe and Canada reporting units, (ii) evaluating the appropriateness of the discounted cash flow analyses and market approaches, (iii) testing the completeness, accuracy, and relevance of underlying data used in the discounted cash flow analyses and market approaches, and (iv) evaluating the significant assumptions used by management including the revenue growth rates and terminal growth rate for the Europe reporting unit and the discount rate, revenue growth rates, market multiples and terminal growth rate for the Canada reporting unit. Evaluating the assumptions related to revenue growth rates involved evaluating whether the assumptions used were reasonable considering (i) the Company’s current and past performance, (ii) the consistency with third party industry and economic data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s discounted cash flow analyses and market approaches and the reasonableness of certain significant assumptions, including the terminal growth rate for the Europe reporting unit and the discount rate, market multiples and terminal growth rate for the Canada reporting unit.
Indefinite-Lived Intangible Asset Impairment Assessment for the Coors Light Brand Distribution Rights (Canada)
As described in Notes 1 and 10 to the consolidated financial statements, the Company’s balance related to indefinite-lived intangible assets of distribution networks as of December 31, 2019 is $778.8 million, inclusive of the Coors Light brand distribution rights in Canada. The carrying value of the indefinite-lived intangible asset is evaluated for impairment at least annually or when an interim triggering event occurs that would indicate that impairment may have taken place. The Company’s annual impairment test is performed as of the first day of the fiscal fourth quarter. As disclosed by management, an excess earnings approach is used to determine the fair value of the indefinite-lived intangible asset. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of management’s indefinite-lived intangible may include items such as (i) a decrease in expected future cash flows, specifically, a decrease in sales volume and increase in costs that could significantly impact management’s immediate and long-range results, (ii) prolonged weakening of economic conditions, or (iii) significant unfavorable changes in tax, environmental or other regulations, including interpretations thereof, terminal growth rates, and / or weighted average cost of capital utilized in the discounted cash flow analyses.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment assessment for the Coors Light brand distribution rights in Canada is a critical audit matter are as follows. There was significant judgment by management when developing the fair value measurement. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing our procedures to evaluate the fair value estimate of the indefinite-lived intangible asset and the significant assumptions, including the discount rate and terminal growth rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible asset impairment assessment for the Coors Light brand distribution rights in Canada, including controls over the valuation. These procedures also included, among others, (i) testing management’s process for determining the fair value of the Coors Light brand distribution rights in Canada indefinite-lived intangible asset, (ii) evaluating the appropriateness of the excess earnings approach, (iii) testing the completeness, accuracy, and relevance of underlying data used in the excess earnings approach, and (iv) evaluating the significant assumptions used by management, including the discount rate and terminal growth rate. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s excess earnings approach and the reasonableness of certain significant assumptions, including the discount rate and terminal growth rate.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
February 12, 2020
We have served as the Company's auditor since 1974.
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
| For the Years Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Sales | $ | 13,009.1 | $ | 13,338.0 | $ | 13,471.5 | |||||
| Excise taxes | (2,429.7 | ) | (2,568.4 | ) | (2,468.7 | ) | |||||
| Net sales | 10,579.4 | 10,769.6 | 11,002.8 | ||||||||
| Cost of goods sold | (6,378.2 | ) | (6,584.8 | ) | (6,236.7 | ) | |||||
| Gross profit | 4,201.2 | 4,184.8 | 4,766.1 | ||||||||
| Marketing, general and administrative expenses | (2,728.0 | ) | (2,802.7 | ) | (3,052.0 | ) | |||||
| Special items, net | (708.8 | ) | 249.7 | (36.4 | ) | ||||||
| Operating income (loss) | 764.4 | 1,631.8 | 1,677.7 | ||||||||
| Other income (expense), net | |||||||||||
| Interest expense | (280.9 | ) | (306.2 | ) | (349.3 | ) | |||||
| Interest income | 8.2 | 8.0 | 6.0 | ||||||||
| Other pension and postretirement benefits (costs), net | 2.9 | 38.2 | 47.4 | ||||||||
| Other income (expense), net | (14.7 | ) | (12.0 | ) | 1.4 | ||||||
| Total other income (expense), net | (284.5 | ) | (272.0 | ) | (294.5 | ) | |||||
| Income (loss) before income taxes | 479.9 | 1,359.8 | 1,383.2 | ||||||||
| Income tax benefit (expense) | (233.7 | ) | (225.2 | ) | 204.6 | ||||||
| Net income (loss) | 246.2 | 1,134.6 | 1,587.8 | ||||||||
| Net (income) loss attributable to noncontrolling interests | (4.5 | ) | (18.1 | ) | (22.2 | ) | |||||
| Net income (loss) attributable to Molson Coors Beverage Company | $ | 241.7 | $ | 1,116.5 | $ | 1,565.6 | |||||
| Net income (loss) attributable to Molson Coors Beverage Company per share: | |||||||||||
| Basic | $ | 1.12 | $ | 5.17 | $ | 7.27 | |||||
| Diluted | $ | 1.11 | $ | 5.15 | $ | 7.23 | |||||
| Weighted-average shares outstanding: | |||||||||||
| Basic | 216.6 | 216.0 | 215.4 | ||||||||
| Dilutive effect of share-based awards | 0.3 | 0.6 | 1.1 | ||||||||
| Diluted | 216.9 | 216.6 | 216.5 | ||||||||
| Anti-dilutive securities excluded from computation of diluted EPS | 1.3 | 0.8 | 0.3 |
See notes to consolidated financial statements.
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
| For the Years Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Net income (loss) including noncontrolling interests | $ | 246.2 | $ | 1,134.6 | $ | 1,587.8 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | 177.6 | (359.0 | ) | 570.7 | |||||||
| Reclassification of cumulative translation adjustment to income | — | 6.0 | — | ||||||||
| Unrealized gain (loss) on derivative instruments | (84.2 | ) | 10.9 | (17.4 | ) | ||||||
| Reclassification of derivative (gain) loss to income | 0.5 | 2.5 | 1.3 | ||||||||
| Pension and other postretirement benefit adjustments | (39.8 | ) | 43.5 | 145.7 | |||||||
| Amortization of net prior service (benefit) cost and net actuarial (gain) loss to income and settlement | 19.7 | 4.9 | 3.6 | ||||||||
| Ownership share of unconsolidated subsidiaries' other comprehensive income (loss) | (10.6 | ) | (0.8 | ) | 10.4 | ||||||
| Total other comprehensive income (loss), net of tax | 63.2 | (292.0 | ) | 714.3 | |||||||
| Comprehensive income (loss) | 309.4 | 842.6 | 2,302.1 | ||||||||
| Comprehensive (income) loss attributable to noncontrolling interests | (5.1 | ) | (16.1 | ) | (24.7 | ) | |||||
| Comprehensive income (loss) attributable to Molson Coors Beverage Company | $ | 304.3 | $ | 826.5 | $ | 2,277.4 |
See notes to consolidated financial statements.
| MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS) | |||||||
|---|---|---|---|---|---|---|---|
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 523.4 | $ | 1,057.9 | |||
| Accounts and other receivables: | |||||||
| Trade, less allowance for doubtful accounts of $12.1 and $14.5, respectively | 705.9 | 736.0 | |||||
| Affiliate receivables | 8.9 | 8.4 | |||||
| Other receivables, less allowance for doubtful accounts of $0.1 and $0.2, respectively | 105.5 | 126.6 | |||||
| Inventories, less allowance for obsolete inventories of $10.8 and $16.2, respectively | 615.9 | 591.8 | |||||
| Other current assets, net | 224.8 | 245.6 | |||||
| Total current assets | 2,184.4 | 2,766.3 | |||||
| Properties, less accumulated depreciation of $3,004.6 and $2,558.8, respectively | 4,546.5 | 4,608.3 | |||||
| Goodwill | 7,631.4 | 8,260.8 | |||||
| Other intangibles, less accumulated amortization of $995.1 and $810.3, respectively | 13,656.0 | 13,776.4 | |||||
| Other assets | 841.5 | 698.0 | |||||
| Total assets | $ | 28,859.8 | $ | 30,109.8 | |||
| Liabilities and equity | |||||||
| Current liabilities: | |||||||
| Accounts payable and other current liabilities (includes affiliate payables of $0.0 and $0.1, respectively) | $ | 2,767.3 | $ | 2,706.4 | |||
| Current portion of long-term debt and short-term borrowings | 928.2 | 1,594.5 | |||||
| Total current liabilities | 3,695.5 | 4,300.9 | |||||
| Long-term debt | 8,109.5 | 8,893.8 | |||||
| Pension and postretirement benefits | 716.6 | 726.6 | |||||
| Deferred tax liabilities | 2,258.6 | 2,128.9 | |||||
| Other liabilities | 406.5 | 323.8 | |||||
| Total liabilities | 15,186.7 | 16,374.0 | |||||
| Commitments and contingencies (Note 18) | |||||||
| Molson Coors Beverage Company stockholders' equity | |||||||
| Capital stock: | |||||||
| Preferred stock, $0.01 par value (authorized: 25.0 shares; none issued) | — | — | |||||
| Class A common stock, $0.01 par value per share (authorized: 500.0 shares; issued and outstanding: 2.6 shares and 2.6 shares, respectively) | — | — | |||||
| Class B common stock, $0.01 par value per share (authorized: 500.0 shares; issued: 205.7 shares and 205.4 shares, respectively) | 2.1 | 2.0 | |||||
| Class A exchangeable shares, no par value (issued and outstanding: 2.7 shares and 2.8 shares, respectively) | 102.5 | 103.2 | |||||
| Class B exchangeable shares, no par value (issued and outstanding: 14.8 shares and 14.8 shares, respectively) | 557.8 | 557.6 | |||||
| Paid-in capital | 6,773.6 | 6,773.1 | |||||
| Retained earnings | 7,617.0 | 7,692.9 | |||||
| Accumulated other comprehensive income (loss) | (1,162.2 | ) | (1,150.0 | ) | |||
| Class B common stock held in treasury at cost (9.5 shares and 9.5 shares, respectively) | (471.4 | ) | (471.4 | ) | |||
| Total Molson Coors Beverage Company stockholders' equity | 13,419.4 | 13,507.4 | |||||
| Noncontrolling interests | 253.7 | 228.4 | |||||
| Total equity | 13,673.1 | 13,735.8 | |||||
| Total liabilities and equity | $ | 28,859.8 | $ | 30,109.8 |
See notes to consolidated financial statements.
| MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Years Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) including noncontrolling interests | $ | 246.2 | $ | 1,134.6 | $ | 1,587.8 | |||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 859.0 | 857.5 | 812.8 | ||||||||
| Amortization of debt issuance costs and discounts | 13.6 | 12.7 | 23.2 | ||||||||
| Share-based compensation | 8.5 | 42.6 | 58.3 | ||||||||
| (Gain) loss on sale or impairment of properties and other assets, net | 614.7 | (8.1 | ) | (0.4 | ) | ||||||
| Unrealized (gain) loss on foreign currency fluctuations and derivative instruments, net | 18.9 | 193.1 | (124.3 | ) | |||||||
| Income tax (benefit) expense | 233.7 | 225.2 | (204.6 | ) | |||||||
| Income tax (paid) received | (57.0 | ) | 32.3 | 86.0 | |||||||
| Interest expense, excluding interest amortization | 272.4 | 304.2 | 338.8 | ||||||||
| Interest paid | (285.0 | ) | (308.7 | ) | (350.3 | ) | |||||
| Pension expense (benefit) | (10.1 | ) | (57.2 | ) | (67.8 | ) | |||||
| Pension contributions paid | (5.1 | ) | (8.9 | ) | (310.0 | ) | |||||
| Change in current assets and liabilities (net of impact of business combinations) and other: | |||||||||||
| Receivables | 38.5 | (38.4 | ) | (7.2 | ) | ||||||
| Inventories | (17.7 | ) | (10.6 | ) | 21.3 | ||||||
| Payables and other current liabilities | (53.0 | ) | 27.6 | 31.0 | |||||||
| Other assets and other liabilities | 19.7 | (66.6 | ) | (28.3 | ) | ||||||
| Net cash provided by operating activities | 1,897.3 | 2,331.3 | 1,866.3 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to properties | (593.8 | ) | (651.7 | ) | (599.6 | ) | |||||
| Proceeds from sales of properties and other assets | 115.9 | 32.5 | 60.5 | ||||||||
| Other | 44.6 | (49.9 | ) | 0.9 | |||||||
| Net cash used in investing activities | (433.3 | ) | (669.1 | ) | (538.2 | ) |
| MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (IN MILLIONS) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Years Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Exercise of stock options under equity compensation plans | 1.6 | 16.0 | 4.0 | ||||||||
| Dividends paid | (424.4 | ) | (354.2 | ) | (353.4 | ) | |||||
| Payments on debt and borrowings | (1,586.2 | ) | (319.8 | ) | (3,000.1 | ) | |||||
| Proceeds on debt and borrowings | 3.0 | — | 1,536.0 | ||||||||
| Net proceeds from (payments on) revolving credit facilities and commercial paper | (4.7 | ) | (374.3 | ) | 374.3 | ||||||
| Other | 3.7 | 23.4 | (57.2 | ) | |||||||
| Net cash provided by (used in) financing activities | (2,007.0 | ) | (1,008.9 | ) | (1,496.4 | ) | |||||
| Cash and cash equivalents: | |||||||||||
| Net increase (decrease) in cash and cash equivalents | (543.0 | ) | 653.3 | (168.3 | ) | ||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 8.5 | (14.0 | ) | 26.0 | |||||||
| Balance at beginning of year | 1,057.9 | 418.6 | 560.9 | ||||||||
| Balance at end of year | $ | 523.4 | $ | 1,057.9 | $ | 418.6 |
See notes to consolidated financial statements. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for supplementary cash flow data.
| MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND NONCONTROLLING INTERESTS (IN MILLIONS) | |||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| MCBC Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||
| Common stock | Exchangeable | Accumulated other | Common Stock held in | Non | |||||||||||||||||||||||||||||||||||
| issued | shares issued | Paid-in- | Retained | comprehensive | treasury | controlling | |||||||||||||||||||||||||||||||||
| Total | Class A | Class B | Class A | Class B | capital | earnings | income (loss) | Class B | interests | ||||||||||||||||||||||||||||||
| Balance as of December 31, 2016 | $ | 11,222.6 | $ | — | $ | 2.0 | $ | 108.1 | $ | 571.2 | $ | 6,635.3 | $ | 5,746.2 | $ | (1,571.8 | ) | $ | (471.4 | ) | $ | 203.0 | |||||||||||||||||
| Exchange of shares | — | — | — | (0.4 | ) | (18.0 | ) | 18.4 | — | — | — | — | |||||||||||||||||||||||||||
| Shares issued under equity compensation plan | (22.9 | ) | — | — | — | — | (22.9 | ) | — | — | — | — | |||||||||||||||||||||||||||
| Amortization of share-based compensation | 57.3 | — | — | — | — | 57.3 | — | — | — | — | |||||||||||||||||||||||||||||
| Acquisition of business and purchase of noncontrolling interest | 1.8 | — | — | — | — | 0.4 | — | — | — | 1.4 | |||||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interests | 1,587.8 | — | — | — | — | — | 1,565.6 | — | — | 22.2 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 714.3 | — | — | — | — | — | — | 711.8 | — | 2.5 | |||||||||||||||||||||||||||||
| Distributions and dividends to noncontrolling interests | (20.2 | ) | — | — | — | — | — | — | — | — | (20.2 | ) | |||||||||||||||||||||||||||
| Dividends declared and paid - $1.64 per share | (353.4 | ) | — | — | — | — | — | (353.4 | ) | — | — | — | |||||||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | 13,187.3 | $ | — | $ | 2.0 | $ | 107.7 | $ | 553.2 | $ | 6,688.5 | $ | 6,958.4 | $ | (860.0 | ) | $ | (471.4 | ) | $ | 208.9 | |||||||||||||||||
| Exchange of shares | — | — | — | (4.5 | ) | 4.4 | 0.1 | — | — | — | — | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plan | 2.8 | — | — | — | — | 2.8 | — | — | — | — | |||||||||||||||||||||||||||||
| Amortization of share-based compensation | 42.2 | — | — | — | — | 42.2 | — | — | — | — | |||||||||||||||||||||||||||||
| Formation of consolidated joint venture | 44.3 | — | — | — | — | 39.4 | — | — | — | 4.9 | |||||||||||||||||||||||||||||
| Purchase of noncontrolling interest | (0.2 | ) | — | — | — | — | 0.1 | — | — | — | (0.3 | ) | |||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interests | 1,134.6 | — | — | — | — | — | 1,116.5 | — | — | 18.1 |
| MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND NONCONTROLLING INTERESTS (Continued) (IN MILLIONS) | |||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| MCBC Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||
| Common stock | Exchangeable | Accumulated other | Common Stock held in | Non | |||||||||||||||||||||||||||||||||||
| issued | shares issued | Paid-in- | Retained | comprehensive | treasury | controlling | |||||||||||||||||||||||||||||||||
| Total | Class A | Class B | Class A | Class B | capital | earnings | income (loss) | Class B | interests | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (292.0 | ) | — | — | — | — | — | — | (290.0 | ) | — | (2.0 | ) | ||||||||||||||||||||||||||
| Adoption of revenue recognition accounting standard | (27.8 | ) | — | — | — | — | — | (27.8 | ) | — | — | — | |||||||||||||||||||||||||||
| Contributions from noncontrolling interests | 21.6 | — | — | — | — | — | — | — | — | 21.6 | |||||||||||||||||||||||||||||
| Distributions and dividends to noncontrolling interests | (22.8 | ) | — | — | — | — | — | — | — | — | (22.8 | ) | |||||||||||||||||||||||||||
| Dividends declared and paid - $1.64 per share | (354.2 | ) | — | — | — | — | — | (354.2 | ) | — | — | — | |||||||||||||||||||||||||||
| Balance as of December 31, 2018 | $ | 13,735.8 | $ | — | $ | 2.0 | $ | 103.2 | $ | 557.6 | $ | 6,773.1 | $ | 7,692.9 | $ | (1,150.0 | ) | $ | (471.4 | ) | $ | 228.4 | |||||||||||||||||
| Exchange of shares | — | — | — | (0.7 | ) | 0.2 | 0.5 | — | — | — | — | ||||||||||||||||||||||||||||
| Shares issued under equity compensation plan | (8.3 | ) | — | 0.1 | — | — | (8.4 | ) | — | — | — | — | |||||||||||||||||||||||||||
| Amortization of share-based compensation | 8.3 | — | — | — | — | 8.3 | — | — | — | — | |||||||||||||||||||||||||||||
| Acquisition of business and purchase of noncontrolling interest | 0.6 | — | — | — | — | 0.1 | — | — | — | 0.5 | |||||||||||||||||||||||||||||
| Deconsolidation of VIE | (1.7 | ) | — | — | — | — | — | — | — | — | (1.7 | ) | |||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interests | 246.2 | — | — | — | — | — | 241.7 | — | — | 4.5 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 63.2 | — | — | — | — | — | — | 62.6 | — | 0.6 | |||||||||||||||||||||||||||||
| Adoption of lease accounting standard (Note 2) | 32.0 | — | — | — | — | — | 32.0 | — | — | — | |||||||||||||||||||||||||||||
| Reclassification of stranded tax effects (Note 2) | — | — | — | — | — | — | 74.8 | (74.8 | ) | — | — | ||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | 34.1 | — | — | — | — | — | — | — | — | 34.1 | |||||||||||||||||||||||||||||
| Distributions and dividends to noncontrolling interests | (12.7 | ) | — | — | — | — | — | — | — | — | (12.7 | ) | |||||||||||||||||||||||||||
| Dividends declared and paid - $1.96 per share | (424.4 | ) | — | — | — | — | — | (424.4 | ) | — | — | — | |||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 13,673.1 | $ | — | $ | 2.1 | $ | 102.5 | $ | 557.8 | $ | 6,773.6 | $ | 7,617.0 | $ | (1,162.2 | ) | $ | (471.4 | ) | $ | 253.7 |
See notes to consolidated financial statements.
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
NOTES TO 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 Beverage Company ("MCBC" or the "Company")(formerly known as Molson Coors Brewing Company), principally a holding company, and its operating and non-operating subsidiaries included within our reporting segments and Corporate. At December 31, 2019, our reporting segments included: MillerCoors LLC ("MillerCoors" or U.S. segment), operating in the U.S.; Molson Coors Canada ("MCC" or Canada segment), operating in Canada; Molson Coors Europe (Europe segment), operating in Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, the Republic of Ireland, Romania, Serbia, the U.K. and various other European countries; and Molson Coors International ("MCI" or International segment), operating in various other countries. As further discussed below, in January 2020, we changed our management structure to two business units, our North America and Europe businesses. Accordingly, the segment reporting implications will not be reflected until the first quarter of 2020.
Unless otherwise indicated, comparisons are to comparable prior periods, and 2019, 2018 and 2017 refers to the 12 months ended December 31, 2019, December 31, 2018, and December 31, 2017, respectively.
Our consolidated financial statements and related disclosures reflect new accounting pronouncements adopted during the year as discussed in Note 2, "New Accounting Pronouncements."
Unless otherwise indicated, information in this report is presented in USD and comparisons are to comparable prior periods. Our primary operating currencies, other than USD, include the CAD, the GBP, and our Central European operating currencies such as the EUR, CZK, HRK and RSD.
Certain amounts within our consolidated statement of comprehensive income (loss) for the year ended December 31, 2017 have been adjusted to reflect presentational reclassifications. See Note 14, "Accumulated Other Comprehensive Income (Loss)" for further details.
Revitalization Plan
On October 28, 2019, we initiated a revitalization plan designed to allow us to invest across our portfolio to drive long-term, sustainable success. As part of our revitalization plan, we made the determination to establish Chicago, Illinois as our North American operational headquarters, close our existing office in Denver, Colorado and consolidate certain administrative functions into our other existing office locations. In connection with these consolidation activities, effective January 1, 2020, we changed our management structure to two business units, our North America and Europe businesses. We began to incur charges related to these restructuring activities during the fourth quarter of 2019; however, the segment financial reporting implications will not be reflected until the first quarter of 2020.
We also changed our name from Molson Coors Brewing Company to Molson Coors Beverage Company in January 2020 in order to better reflect our strategic intent to expand beyond beer and into other growth adjacencies in the beverage industry. See Note 3, "Segment Reporting," and Note 7, "Special Items" for further discussion of the impacts of this plan.
Principles of Consolidation
Our consolidated financial statements include our accounts and our majority-owned and controlled domestic and foreign subsidiaries, as well as certain VIEs for which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018 using the modified retrospective transition approach. The adoption of this guidance in 2018 did not have a significant impact to our core revenue generating activities. However, it did result in the reclassification of certain cash payments to customers from marketing, general and administrative expenses to a
reduction of revenue. This classification change resulted in a reduction of revenue and marketing, general and administrative expenses by approximately $60 million during 2018 versus 2017, which is presented under historical U.S. GAAP, primarily within our Canada segment. The adoption of this guidance also resulted in a change in the timing of recognition of certain promotional discounts and cash payments to customers, which shifted financial statement recognition primarily amongst quarters, however, the full-year impact was not significant to our financial results.
Our net sales represent the sale of beer, malt beverages and other adjacencies, net of excise tax. Sales are stated net of incentives, discounts and returns. Sales of products are for cash or otherwise agreed upon credit terms. Our payment terms vary by location and customer, however, the time period between when revenue is recognized and when payment is due is not significant. Our revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and our obligation has been fulfilled, which is when the related goods are shipped or delivered to the customer, depending upon the method of distribution and shipping terms. Where our products are sold under consignment arrangements, revenue is not recognized until control has transferred, which is when the product is sold to the end customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the sale of our product. The cost of various programs, such as price promotions, rebates and coupons are treated as a reduction of sales. In certain of our markets, we make cash payments to customers such as slotting or listing fees, or payments for other marketing or promotional activities. These cash payments are recorded as a reduction of revenue unless we receive a distinct good or service as defined under ASC 606. Specifically, a good or service is considered distinct when it is separately identifiable from other promises in the contract, we receive a benefit from the good or service, and the benefit is separable from the sale of our product to the customer.
Certain payments made to customers are conditional on the achievement of volume targets, marketing commitments, or both. If paid in advance, we record such payments as prepayments and amortize them over the relevant period to which the customer commitment is made (generally up to five years). When the payment is not for a distinct good or service, or fair value cannot be reasonably estimated, the amortization of the prepayment or the cost as incurred is recorded as a reduction of revenue. Where a distinct good or service is received and fair value can be reasonably estimated, the cost is included as marketing, general and administrative expenses. The amounts deferred are reassessed regularly for recoverability over the contract period and are impaired where there is objective evidence that the benefits will not be realized or the asset is otherwise not recoverable. Separately, as discussed below, we analyze whether these advance payments contain a significant financing component for potential adjustment to the transaction price.
Our primary revenue generating activity represents the sale of beer and other malt beverages to customers, including both domestic and exported product sales. Our customer could be a distributor, retail or on-premise outlet, depending on the market. The majority of our revenues are generated from brands that we own and brew ourselves, however, we also import or brew and sell certain non-owned partner brands under licensing and related arrangements. In addition, primarily in the U.K., as well as certain other countries in our Europe segment, we sell other beverage companies' products to on-premise customers to provide them with a full range of products for their retail outlets. We refer to this as the "factored brand business." Sales from this business are included in our net sales and cost of goods sold when ultimately sold. In the factored brand business, we normally purchase inventory, which includes excise taxes charged by the vendor, take orders from customers for such brands, negotiate with the customers on pricing and invoice customers for the product and related costs of delivery. In addition, we incur the risk of loss at times we are in possession of the inventory and for the receivables due from the customers. Revenues for owned brands, partner and imported brands, as well as factored brands are recognized at the point in time when control is transferred to the customer as discussed above.
Other Revenue Generating Activities
We contract manufacture for other brewers in some of our markets. These contractual agreements require us to brew, package and ship certain brands to these brewers, who then sell the products to their own customers in their respective markets. Revenues under contract brewing arrangements are recognized when our obligation related to the finished product is fulfilled and control of the product transfers to these other brewers.
We also have licensing agreements with third party partners who brew and distribute our products in various markets across our segments. Under these agreements, we are compensated based on the amount of products sold by our partners in these markets at an agreed upon royalty rate or profit percentage. We apply the sales-based royalty practical expedient to these licensing arrangements and recognize revenue as product is sold by our partners at the agreed upon rate.
We have evaluated these other revenue generating activities under the disaggregation disclosure criteria outlined within the guidance and concluded that these other revenue generating activities are immaterial for separate disclosure. See Note 3, "Segment Reporting," for disclosure of revenues by geographic segment.
Variable Consideration
Our revenue generating activities include variable consideration which is recorded as a reduction of the transaction price based upon expected amounts at the time revenue for the corresponding product sale is recognized. For example, customer promotional discount programs are entered into with certain distributors for certain periods of time. The amount ultimately reimbursed to distributors is determined based upon agreed-upon promotional discounts which are applied to distributors' sales to retailers. Other common forms of variable consideration include volume rebates for meeting established sales targets, and coupons and mail-in rebates offered to the end consumer. The determination of the reduction of the transaction price for variable consideration requires that we make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. We estimate this variable consideration, including analyzing for a potential constraint on variable consideration, by taking into account factors such as the nature of the promotional activity, historical information and current trends, availability of actual results, and expectations of customer and consumer behavior.
We do not have standard terms that permit return of product; however, in certain markets where returns occur we estimate the amount of returns as variable consideration based on historical return experience and adjust our revenue accordingly. Products that do not meet our high quality standards are returned by the customer or recalled and destroyed and are recorded as a reduction of revenue. The reversal of revenue is recorded upon determination that the product will be recalled and destroyed. We estimate the costs required to facilitate product returns and record them in cost of goods sold as required.
During the twelve months ended December 31, 2019 and December 31, 2018, adjustments to revenue from performance obligations satisfied in the prior period due to changes in estimates in variable consideration were immaterial.
Significant Financing Component and Costs to Obtain Contracts
In certain of our businesses where such practices are legally permitted, we make loans or advanced payments to retail outlets that sell our brands. For arrangements that do not span greater than one year, we apply the practical expedient available under ASC 606 and do not adjust the transaction price for the effects of a potential significant financing component. We further analyze arrangements that span greater than one year on an ongoing basis to determine whether a significant financing component exists. No such arrangements existed during the twelve months ended December 31, 2019 or December 31, 2018.
Advance payments to customers, where legally permitted, are deferred and amortized as a reduction to revenue over the expected period of benefit and tested for recoverability as appropriate. All other costs to obtain and fulfill contracts are expensed as incurred based on the nature, significance and expected benefit of these costs relative to the contract.
Contract Assets and Liabilities
We continually evaluate whether our revenue generating activities and advanced payment arrangements with customers result in the recognition of contract assets or liabilities. No such assets or liabilities existed as of December 31, 2019 or December 31, 2018. Separately, trade accounts receivable, including affiliate receivables, approximates receivables from contracts with customers.
Shipping and Handling
Freight costs billed to customers for shipping and handling are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. We account for shipping and handling activities that occur after control has transferred as a fulfillment cost as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue.
Excise Taxes
Excise taxes remitted to tax authorities are government-imposed excise taxes on beer. Excise taxes are shown in a separate line item in the consolidated statements of operations as a reduction of sales. Excise taxes are recognized as a current liability within accounts payable and other current liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.
Cost of Goods Sold
Our cost of goods sold includes costs we incur to make and ship beer and other malt beverages. These costs include brewing materials, such as barley, hops and various grains. Packaging materials, such as glass bottles, aluminum cans, cardboard and paperboard are also included in our cost of goods sold. Additionally, our cost of goods sold include both direct and indirect labor, shipping and handling including freight costs, utilities, maintenance costs, warehousing costs, purchasing and receiving costs, depreciation, promotional packaging, other manufacturing overheads and costs to purchase factored and other non-owned brands from suppliers, as well as the estimated cost to facilitate product returns.
Marketing, General and Administrative Expenses
Our marketing, general and administrative expenses include media advertising (television, radio, digital, print), tactical advertising (signs, banners, point-of-sale materials) and promotion costs on both local and national levels within our operating segments. The creative portion of our advertising activities is expensed as incurred. Production costs of advertising and promotional materials are expensed when the advertising is first run. Marketing, general and administrative expenses also include integration costs of $25.0 million, $38.8 million and $70.6 million for 2019, 2018 and 2017, respectively.
This classification also includes general and administrative costs for functions such as finance, legal, human resources and information technology, along with integration costs as noted above. These costs primarily consist of labor and outside services, as well as bad debt expense related to our allowance for doubtful accounts. Unless capitalization is allowed or required by U.S. GAAP, legal costs are expensed when incurred. These costs also include our marketing and sales organizations, including labor and other overheads. This line item additionally includes amortization costs associated with intangible assets, as well as certain depreciation costs related to non-production equipment and share-based compensation.
Share-based compensation is recognized using a straight-line method over the vesting period of the awards. We include estimated forfeitures expected to occur when calculating share-based compensation expense. Our share-based compensation plan and the awards within it contain provisions that accelerate vesting of awards upon change in control, retirement, disability or death of eligible employees and directors. Our share-based awards are considered vested when the employee's retention of the award is no longer contingent on providing service, which for certain awards can result in immediate recognition for awards granted to retirement-eligible individuals or accelerated recognition for awards granted to individuals that will become retirement eligible within the stated vesting period. Also, if less than the stated vesting period, we recognize these costs over the period from the grant date to the date retirement eligibility is achieved.
Special Items
Our special items represent charges incurred or benefits realized that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification; specifically, such items are considered to be one of the following:
-
infrequent or unusual items,
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impairment or asset abandonment-related losses,
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restructuring charges and other atypical employee-related costs, or
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fees on termination of significant operating agreements and gains (losses) on disposal of investments.
The items classified as special items are not necessarily non-recurring, however, they are deemed to be incremental to income earned or costs incurred by the company in conducting normal operations, and therefore are presented separately from other components of operating income.
Interest Expense, net
Our interest costs are associated with borrowings to finance our operations and acquisitions. Interest earned on our cash and cash equivalents across our business is recorded as interest income. Changes in estimates (if any) to mandatorily redeemable noncontrolling interest liabilities, which are presented within accounts payable and other current liabilities on the consolidated balance sheet, are also recognized within interest expense.
We capitalize interest cost as a part of the original cost of acquiring certain fixed assets if the cost of the capital expenditure and the expected time to complete the project are considered significant.
Other Income (Expense)
Our other income (expense) classification primarily includes gains and losses associated with activities not directly related to our operations. For instance, aggregate unrealized and realized foreign exchange gains and losses resulting from remeasurement and settlement of foreign-denominated monetary assets and liabilities, as well as certain gains or losses on sales of non-operating assets and the mark-to-market activity associated with warrants are classified in this line item. These gains and losses are reported in the operating segment in which they occur; however, foreign exchange gains and losses on intercompany balances related to financing and other treasury-related activities are reported within the Corporate segment. The initial recording of foreign-denominated transactions are classified based on the nature of the transaction, with the unrealized or realized foreign exchange gains or losses resulting from the subsequent remeasurement of the monetary asset or liability, and its ultimate settlement, classified in other income (expense).
Income Taxes
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets, liabilities, and certain unrecognized gains and losses recorded in accumulated other comprehensive income (loss). We apply the intraperiod tax allocation rules to allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income (loss), when we meet the criteria prescribed by U.S. GAAP.
We annually distribute cash from our foreign subsidiaries’ current year earnings and record the tax impacts associated with these transactions. Any current earnings not otherwise distributed or planned to be distributed in the current year are considered permanently reinvested in our foreign operations. The aggregate of these earnings is currently a deficit for U.S. tax purposes and would not result in any material taxes, if distributed. We have no plans to dispose of foreign subsidiaries and would not expect outside basis differences in foreign subsidiaries to reverse with material tax consequences.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained based on its technical merits. We measure and record the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest, penalties and offsetting positions related to unrecognized tax benefits are recognized as a component of income tax expense. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
We account for the tax effects of global intangible low-taxed income (“GILTI”) as a component of income tax expense in the period the tax arises, to the extent applicable.
Other Comprehensive Income (Loss)
OCI represents income and losses for the reporting period, including the related tax impacts, which are excluded from net income (loss) and recognized directly within AOCI as a component of equity. OCI also includes amounts reclassified to income during the reporting period that were previously recognized within AOCI. Amounts remaining within AOCI are expected to be reclassified out of AOCI in the future, at which point they will be recognized within the consolidated statement of operations as a component of net income (loss). We recognize OCI related to the translation of assets and liabilities of our foreign subsidiaries which are denominated in currencies other than USD, unrealized gains and losses on the effective portion of our derivatives designated in cash flow and net investment hedging relationships, actuarial gains and losses and prior service costs related to our pension and other post-retirement benefit plans, as well as our proportionate share of our equity method investments' OCI. Additionally, when we do not have the expectation or intent to cash settle certain of our intercompany note receivable and note payable positions in the foreseeable future, the remeasurement of these instruments is recorded as a component of foreign currency translation adjustments within OCI. We release stranded tax effects from AOCI using either a specific identification approach or portfolio approach based on the nature of the underlying item.
Earnings Per Share
Basic EPS was computed using the weighted-average number of shares of common stock outstanding during the period. Diluted EPS includes the additional dilutive effect of our potentially dilutive securities, which include RSUs, DSUs, PSUs, and stock options. The dilutive effects of our potentially dilutive securities are calculated using the treasury stock method. Our calculation of weighted-average shares includes Class A common stock and Class B common stock, and Class A exchangeable shares and Class B exchangeable shares. All classes of stock have in effect the same dividend rights and share equitably in undistributed earnings. Holders of Class A common stock receive dividends only to the extent dividends are declared and paid to holders of Class B common stock. See Note 8, "Stockholders' Equity" for further discussion of the Class A common stock and Class B common stock and Class A exchangeable shares and Class B exchangeable shares. We have no unvested outstanding equity share awards that contain non-forfeitable rights to dividends.
Cash and Cash Equivalents
Cash consists of cash on hand and bank deposits. Cash equivalents represent highly liquid investments with original maturities of three months or less. Our cash deposits are maintained with multiple, reputable financial institutions.
Non-cash activity includes non-cash issuances of share-based awards, as well as non-cash investing activities related to movements in our guarantee of indebtedness of certain equity method investments. We also had other non-cash activities primarily related to capital expenditures incurred but not yet paid of $214.9 million, $221.0 million and $231.7 million during 2019, 2018 and 2017, respectively. Additionally, the initial recognition of the warrants discussed in Note 16, “Derivative Instruments and Hedging Activities” represents a non-cash financing activity in 2018, and during 2017, we also had non-cash activities related to the acquisition of a business.
Other than the activity mentioned above and the supplemental non-cash activity related to the recognition of leases discussed in Note 19, "Leases," there was no other significant non-cash activity in 2019, 2018 and 2017. See Note 4, "Investments," Note 13, "Share-Based Payments," Note 16, “Derivative Instruments and Hedging Activities” and Note 19, "Leases" for further discussion.
Accounts Receivable and Notes Receivable
We record accounts and notes receivable at net realizable value. This carrying value includes an appropriate allowance for estimated uncollectible amounts to reflect any loss anticipated on the accounts and notes receivable balances. We calculate this allowance based on our country-specific history of write-offs, level of past-due accounts based on the contractual terms of the receivables and our relationships with and the economic status of our customers, which may be impacted by current macroeconomic and regulatory factors specific to the country of origin.
In the U.K., loans are extended to a portion of the retail outlets that sell our brands. We establish an allowance through a provision for loan losses charged against earnings and recorded in marketing, general and administrative expenses. Loan balances that are written off are recorded against the allowance as a write-off. Activity within the allowance for credit losses was immaterial for fiscal years 2019, 2018 and 2017.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out ("FIFO") method. We regularly assess the shelf-life of our inventories and reserve for those inventories when it becomes apparent the product will not be sold within our freshness specifications.
Other current assets
Other current assets include prepaid assets, maintenance and operating supplies, promotion materials and derivative assets that are expected to be recognized or realized within the next 12 months. Maintenance and operating supplies include our inventories of spare parts, which are kept on hand for repairs and maintenance of machinery and equipment. The majority of spare parts within our business include motors, fillers and other components that are required to maintain a normal level of production in the event that expected maintenance and/or repairs are required. These parts are inventoried within current assets as they are reasonably expected to be used during the normal operating cycle of the business and are reserved for excess and obsolescence, as appropriate. The allowance for obsolete supplies was $11.4 million and $9.2 million as of December 31, 2019, and December 31, 2018, respectively.
Properties
Properties are stated at original cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are reviewed periodically and have the following ranges: buildings and improvements: 20-40 years; machinery and equipment: 3-25 years; furniture and fixtures: 3-10 years; returnable containers: 2-15 years; and software: 3-5 years. Land is not depreciated, and construction in progress is not depreciated until ready for service. Costs of enhancements or modifications that substantially extend the capacity or useful life of an asset are capitalized and depreciated accordingly. Ordinary repairs and maintenance are expensed as incurred. When property is sold or otherwise disposed of, the cost and accumulated depreciation are removed from our consolidated balance sheets and the resulting gain or loss, if any, is reflected in our consolidated statements of operations. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable.
Returnable containers are recorded at acquisition cost and consist of returnable bottles, kegs, pallets and crates that are both in our direct control within our breweries, warehouses and distribution facilities and those that we indirectly control in the market through our agreements with our customers and other brewers and for which a deposit is received. The deposits received on our returnable containers in the market are recorded as deposit liabilities, included as current liabilities within accounts payable and other current liabilities in the consolidated balance sheets. We estimate that the loss, breakage and deterioration of our returnable containers is comparable to the depreciation calculated on an estimated useful life of up to 4 years for bottles, 5 years for pallets, 7 years for crates, and 15 years for returnable kegs. We also own and maintain other equipment in the market related to delivery of our products to end consumers, for example on-premise dispense equipment and refrigeration units. This equipment is recorded at acquisition cost and depreciated over lives of up to 7 years, depending on the market, reflecting the use of the equipment, as well as the loss and deterioration of the asset.
The costs of acquiring or developing internal-use computer software, including directly-related payroll costs for internal resources, are capitalized and classified within properties. Software maintenance and training costs are expensed in the period incurred. Implementation costs incurred in hosting arrangements that are service contracts are currently capitalized within
properties. See Note 2, "New Accounting Pronouncements" for further discussion of the changes to the accounting for implementation costs incurred in a hosting arrangement that became effective January 1, 2020.
Properties held under finance lease (previously known as capital) are depreciated using the straight-line method over the estimated useful life or the lease term, whichever is shorter, and the related depreciation is included in depreciation expense. Finance lease assets for which ownership is transferred at the end of the lease, or there is a purchase option that we are reasonably certain to exercise, are amortized over the useful life that would be assigned if the asset were owned.
Goodwill and Other Intangible Assets
Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. As of the date of completion of our 2019 impairment testing, the operations in each of the specific regions within our U.S., Canada, Europe and International segments are considered components based on the availability of discrete financial information and the regular review by segment management. We have concluded that the components within the U.S., Canada and Europe segments each meet the criteria as having similar economic characteristics and therefore have aggregated these components into the U.S., Canada and Europe reporting units, respectively. Additionally, we determined that the components within our International segment do not meet the criteria for aggregation with the exception of the operations of our India businesses, which constitute a separate reporting unit. As the changes in management structure resulting from the revitalization plan discussed above were not effective until January 1, 2020, potential changes to our reporting unit conclusions, if any, have not yet been evaluated and concluded.
As required, we evaluate the carrying value of our goodwill and indefinite-lived intangible assets for impairment at the reporting unit level at least annually or when an interim triggering event occurs that would indicate that impairment may have taken place. Our annual test is performed as of the first day of our fiscal fourth quarter. We continuously monitor the performance of our other definite-lived intangible assets and evaluate for impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant judgments and assumptions are required in such impairment evaluations. Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization is recorded using the straight-line method over the estimated lives of the assets as this approximates the pattern in which the assets economic benefits are consumed.
Equity Method Investments
We apply the equity method of accounting to 20% to 50% owned investments where we exercise significant influence or VIEs for which we are not the primary beneficiary. We use the cumulative earnings approach for determining cash flow presentation of cash distributions received from equity method investees. Distributions received are included in our consolidated statements of cash flows as operating activities, unless the cumulative distributions exceed our portion of the cumulative equity in the net earnings of the equity method investment, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in our consolidated statements of cash flows. See Note 4, "Investments" for further information regarding our equity method investments.
There are no related parties that own interests in our equity method investments as of December 31, 2019.
Derivative Hedging Instruments
We use derivatives as part of our normal business operations to manage our exposure to fluctuations in interest rates, foreign currency exchange, commodity prices, production and packaging material costs and for other strategic purposes related to our core business. We enter into derivatives for risk management purposes only, including derivatives designated in hedge accounting relationships as well as those derivatives utilized as economic hedges. We do not enter into derivatives for trading or speculative purposes. We recognize our derivatives on the consolidated balance sheets as assets or liabilities at fair value and are classified in either current or non-current assets or liabilities based on each contract's respective unrealized gain or loss position and each contract's respective maturity. Our policy is to present all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar arrangements. Further, our current derivative agreements do not allow us to net positions with the same counterparty and therefore, we present our derivative positions gross in our consolidated balance sheets.
Changes in fair values of outstanding cash flow and net investment hedges are recorded in OCI, until earnings are affected by the variability of cash flows of the underlying hedged item or the sale of the underlying net investment, respectively. Effective cash flow hedges offset the gains or losses recognized on the underlying exposure in the consolidated statements of operations, or for net investment hedges, the foreign exchange translation gain or loss recognized in AOCI. Changes in fair value of outstanding fair value hedges and the offsetting changes in fair value of the hedged item are recognized in earnings.
Changes in fair value of the derivative attributable to components allowed to be excluded from the assessment of hedge effectiveness are deferred in AOCI and recognized in earnings over the life of the hedge.
We record realized gains and losses from derivative instruments in the same financial statement line item as the hedged item/forecasted transaction. Changes in unrealized gains and losses for derivatives not designated in a hedge accounting relationship are recorded directly in earnings each period and are also recorded in the same financial statement line item as the hedged item/forecasted transaction. Cash flows from the settlement of derivatives, including both economic hedges and those designated in hedge accounting relationships, appear in the consolidated statements of cash flows in the same categories as the cash flows of the hedged item.
In accordance with authoritative accounting guidance, we do not record the fair value of derivatives for which we have elected the Normal Purchase Normal Sale ("NPNS") exemption. We account for these contracts on an accrual basis, recording realized settlements related to these contracts in the same financial statement line items as the corresponding transaction.
Leases
We account for leases in accordance with Accounting Standards Codification (“ASC”) Topic 842, Leases, which we adopted on January 1, 2019, electing not to adjust comparative periods presented and applying a modified retrospective transition approach as of the effective date of adoption (see Note 2, "New Accounting Pronouncements" for impacts of adoption).
We enter into contractual arrangements for the utilization of certain non-owned assets, primarily real estate and equipment, which are evaluated as finance or operating leases upon commencement, and are accounted for accordingly. Specifically, under ASC 842, a contract is or contains a lease when, (1) the contract contains an explicitly or implicitly identified asset and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. We assess whether an arrangement is or contains a lease at inception of the contract. For all contractual arrangements deemed to be leases (other than short-term leases), as of the lease commencement date, we recognize on the consolidated balance sheet a liability for our obligation related to the lease and a corresponding asset representing our right to use the underlying asset over the period of use.
For leases that qualify as short-term leases, we have elected, for all classes of underlying assets, to not apply the balance sheet recognition requirements of ASC 842, and instead, we recognize the lease payments in the consolidated statements of operations on a straight-line basis over the lease term. We have also made the election, for our existing real estate and equipment classes of underlying assets, to account for lease and non-lease components as a single lease component.
Our leases have remaining lease terms of up to approximately 19 years. Certain of our lease agreements contain options to extend or early terminate the agreement. The lease term used to calculate the right-of-use asset and lease liability at commencement includes the impacts of options to extend or terminate the lease when it is reasonably certain that we will exercise that option. When determining whether it is reasonably certain that we will exercise an option at commencement, we consider various existing economic factors, including real estate strategies, the nature, length, and terms of the agreement, as well as the uncertainty of the condition of leased equipment at the end of the lease term. Based on these determinations, we generally conclude that the exercise of renewal options would not be reasonably certain in determining the lease term at commencement. Assumptions made at the commencement date are re-evaluated upon occurrence of certain events requiring a lease modification. Additionally, for certain equipment leases involving groups of similar leased assets with similar lease terms, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities.
The discount rate used to calculate the present value of the future minimum lease payments is the rate implicit in the lease, when readily determinable. As the rate implicit in the lease is rarely readily determinable, we use our incremental borrowing rate relative to the leased asset.
Certain of our leases include variable lease payments, primarily for items such as property taxes, insurance, maintenance, and other operating expenses associated with leased assets. These variable payments are excluded from the measurement of our lease assets and liabilities, and are recognized in the period in which the obligation for those payments is incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease-related expense is recorded within either cost of goods sold or marketing, general and administrative expenses on the consolidated statements of operations, depending on the function of the underlying leased asset, with the exception of interest on finance lease liabilities, which is recorded within interest expense on the consolidated statements of operations.
Pension and Postretirement Benefits
We maintain retirement plans for the majority of our employees. We offer different types of plans within each segment, including defined benefit plans, defined contribution plans and OPEB plans. Each plan is managed locally and in accordance with respective local laws and regulations. Our equity investments, Brewers' Retail Inc. ("BRI") and Brewers' Distributor Ltd. ("BDL"), maintain defined benefit, defined contribution and postretirement benefit plans as well.
We recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in the consolidated balance sheets. The funded status of a plan, measured as the difference between the fair value of plan assets and the projected benefit obligation, and the related net periodic pension cost are calculated using a number of significant actuarial assumptions. Changes in net periodic pension cost and funding status may occur in the future due to changes in these assumptions.
We use the fair value approach to calculate the market-related value of pension plan assets used to determine net periodic pension cost, which includes measuring the market-related value of plan assets at fair value for purposes of determining the expected return on plan assets and amount of gain or loss subject to amortization.
Projected benefit obligation is the actuarial present value as of the measurement date of all benefits attributed by the plan benefit formula to employee service rendered before the measurement date using assumptions as to future compensation levels and years of service if the plan benefit formula is based on those future compensation levels and years of service. Accumulated benefit obligation is the actuarial present value of benefits (whether vested or unvested) attributed by the plan benefit formula to employee service rendered before the measurement date and based on employee service and compensation, if applicable, prior to that date. Accumulated benefit obligation differs from projected benefit obligation in that it includes no assumption about future compensation levels and years of service.
We employ the corridor approach for determining each plan's potential amortization from AOCI of deferred gains and losses, which occur when actual experience differs from estimates, into our net periodic pension and postretirement benefit cost. This approach defines the "corridor" as the greater of 10% of the projected benefit obligation or 10% of the market-related value of plan assets and requires amortization of the excess net gain or loss that exceeds the corridor over the average remaining service periods of active plan participants. For plans closed to new entrants and the future accrual of benefits, the average remaining life expectancy of all plan participants (including retirees) is used.
Fair Value Measurements
The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value as recorded due to the short-term nature of these instruments. In addition, the carrying amounts of our trade loan receivables, net of allowances, approximate fair value. The fair value of derivatives is estimated by discounting the estimated future cash flows utilizing observable market interest, foreign exchange and commodity rates adjusted for non-performance credit risk associated with our counterparties (assets) or with MCBC (liabilities), as appropriate. Additionally, the fair value of warrants is estimated using the Black-Scholes valuation model. See Note 16, "Derivative Instruments and Hedging Activities" for additional information. Based on current market rates for similar instruments, the fair value of long-term debt is presented in Note 11, "Debt."
U.S. GAAP guidance for fair value includes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy.
The three levels of the hierarchy are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are less active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect the assumptions that we believe market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
Foreign Currency
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of OCI. Gains and losses from foreign currency transactions are included in earnings for the period. Revenue and expenses are translated at the average exchange rates during the respective period throughout the year.
2. New Accounting Pronouncements
Adoption of New Accounting Pronouncements
Leases
In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and liabilities on the balance sheet and disclosure of key information about leasing arrangements. We adopted this guidance and all related amendments applying the modified retrospective transition approach to all lease arrangements as of the effective date of adoption, January 1, 2019. As permitted under the guidance, financial statements for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts have not been adjusted and continue to be reported and disclosed in accordance with historical accounting guidance. Additionally, for existing leases as of the effective date, we have elected the package of practical expedients available at transition to not reassess the historical lease determination, lease classification and initial direct costs.
For operating leases, the adoption of the new guidance resulted in the recognition of right-of-use assets of approximately $154 million and aggregate current and non-current lease liabilities of approximately $164 million as of January 1, 2019, including immaterial reclassifications of prepaid and deferred rent balances into right-of-use assets. Separately, as a result of the cumulative impact of adopting the new guidance, we recorded a net increase to opening retained earnings of approximately $32 million as of January 1, 2019 with the offsetting impact within other assets, related to our share of the accelerated recognition of deferred gains on non-qualifying and other sale-leaseback transactions by an equity method investment within our Canada segment. Additionally, while our accounting for finance leases remains unchanged at adoption, we have prospectively changed the presentation of finance lease liabilities within the consolidated balance sheets to be presented within current portion of long-term debt and short-term borrowings, and long-term debt, as appropriate. As of January 1, 2019, we reclassified approximately $3 million and $82 million of short-term and long-term finance lease liabilities from accounts payable and other current liabilities and other non-current liabilities to current portion of long-term debt and short-term borrowings and long-term debt, respectively. The adoption of this guidance had no impact to our cash flows from operating, investing, or financing activities. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” and Note 19, "Leases" for additional discussion on our leasing arrangements.
Accumulated Other Comprehensive Income (Loss)
In February 2018, the FASB issued authoritative guidance intended to improve the usefulness of financial information related to the enactment of the 2017 Tax Act. This guidance provides an option to reclassify from AOCI to retained earnings the stranded tax effects resulting from the change in the U.S. federal corporate income tax rate as a result of the 2017 Tax Act. We adopted this guidance as of January 1, 2019 and elected to reclassify stranded tax effects related to the 2017 Tax Act, resulting in an approximate $75 million increase to retained earnings in the period of adoption.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued authoritative guidance that changes the impairment model used to measure credit losses for most financial instruments. The new guidance replaces the existing incurred credit loss model, and requires the application of a forward-looking expected credit loss model, which will generally result in earlier recognition of allowances for credit losses for financial instruments that are in scope of the new guidance, including trade receivables. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. We are currently evaluating the potential impact of this guidance and do not expect it will have a material impact on our financial statements.
In August 2018, the FASB issued authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires presentation of the capitalized implementation costs in the statement of financial position and in the statement of cash flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with
the hosting element (service) of the arrangement. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. We will adopt this guidance prospectively in the first quarter of 2020 and are currently evaluating the impact on our financial position, results of operations and statement of cash flows. The adoption of this guidance will result in the change in presentation of capitalized implementation costs related to hosting arrangements from properties to other assets on the consolidated balance sheet, as well as the expense related to such costs no longer being classified as depreciation expense and cash flows related to those costs no longer being presented as investing activities.
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. We are currently evaluating the potential impact of this guidance and do not expect it will have a material impact on our financial statements.
Other than the items noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that we believe have a significant impact, or potential significant impact, to our consolidated financial statements.
3. Segment Reporting
Our reporting segments are based on the key geographic regions in which we operate, which are the basis on which our chief operating decision maker evaluates the performance of the business.
On October 28, 2019, as part of our revitalization plan, we made the determination to establish Chicago, Illinois as our North American operational headquarters, close our existing office in Denver, Colorado and consolidate certain administrative functions into our other existing office locations. In connection with these consolidation activities, effective January 1, 2020, we changed our management structure to two business units, our North America and Europe businesses. Accordingly, the segment financial reporting implications will not be reflected until the first quarter of 2020.
Reporting Segments as of December 31, 2019
United States
The U.S. segment consists of our production, marketing and sales of our brands and other owned and licensed brands in the U.S. We also have an agreement to brew, package and ship products for Pabst Brewing Company, LLC. Additionally, the U.S. segment produces beer for export to our Canada and International segments.
Canada
The Canada segment consists of our production, marketing and sales of our brands and other owned and licensed brands in Canada. The Canada segment also includes BRI, our joint venture arrangement related to the distribution and retail sale of beer in Ontario, and BDL, our joint venture arrangement related to the distribution of beer in the western provinces. Both BRI and BDL are accounted for as equity method investments.
We have an agreement with Heineken N.V. ("Heineken") that grants us the right to import, market, distribute and sell certain Heineken products in Canada. We also contract brew and package certain Labatt brands for the U.S. market.
Europe
The Europe segment consists of our production, marketing and sales of our brands as well as a number of smaller regional brands in the U.K., the Republic of Ireland and Central Europe. Additionally, European markets including Sweden, Spain, Germany, Ukraine and Russia are reported within our Europe segment. Our European business also has licensing agreements and distribution agreements with various other brewers. A portion of the operating results of the international Miller brand portfolio are reported in the Europe segment.
International
The objective of the International segment is to grow and expand our business and brand portfolio in new and existing markets, including emerging markets, outside the U.S., Canada, and Europe segments. The International segment includes operations in Latin America, Asia Pacific and Africa. International operates through a combination of export and license arrangements, in addition to our India business that produces, markets and sells our products and our Japan business that imports, markets and sells our and certain other third-party products.
Corporate
Corporate is not a reportable segment and primarily includes interest and certain other general and administrative costs that are not allocated to any of the operating segments as well as the results of our water resources and energy operations in Colorado and the unrealized changes in fair value on our commodity swaps not designated in hedging relationships recorded within cost of goods sold, which are later reclassified when realized to the segment in which the underlying exposure resides. The majority of these corporate costs relate to worldwide administrative functions, such as corporate affairs, legal, human resources, information technology, finance, internal audit, insurance, ethics and compliance, risk management, global growth, supply chain and commercial initiatives. Additionally, only the service cost component of net periodic pension and OPEB cost is reported within each operating segment, and all other components are reported within the Corporate segment.
Summarized Financial Information
No single customer accounted for more than 10% of our consolidated sales in 2019, 2018 or 2017. Consolidated net sales represent sales to third-party external customers less excise taxes. Inter-segment transactions impacting net sales revenues and income (loss) before income taxes eliminate in consolidation and, for fiscal year 2019 are U.S. segment sales of $94.2 million to our International segment and $17.5 million to our Canada segment, as well as approximately $12 million of Canada inter-segment sales to the U.S.
The following tables represent consolidated net sales, interest expense, interest income and reconciliations of amounts shown as income (loss) before income taxes to income (loss) attributable to MCBC. Income (loss) before income taxes includes the impact of special items; refer to Note 7, "Special Items" for further discussion. Additionally, integration costs of $25.0 million, $38.8 million and $70.6 million for 2019, 2018 and 2017, respectively, were recorded within marketing, general and administrative expenses, primarily within the Corporate segment.
| Year ended December 31, 2019 | |||||||||||||||||||||||||||
| U.S. | Canada**(1)** | Europe | International**(2)** | Corporate**(3)** | Inter-segment net sales eliminations | Consolidated | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||
| Net sales | $ | 7,241.3 | $ | 1,307.4 | $ | 1,928.7 | $ | 225.3 | $ | 0.8 | $ | (124.1 | ) | $ | 10,579.4 | ||||||||||||
| Interest expense | 3.0 | (0.2 | ) | (6.2 | ) | — | (277.5 | ) | — | (280.9 | ) | ||||||||||||||||
| Interest income | — | — | 0.5 | — | 7.7 | — | 8.2 | ||||||||||||||||||||
| Income (loss) before income taxes | $ | 1,301.8 | $ | (508.7 | ) | $ | 160.1 | $ | (7.7 | ) | $ | (465.6 | ) | $ | — | $ | 479.9 | ||||||||||
| Income tax benefit (expense) | (233.7 | ) | |||||||||||||||||||||||||
| Net income (loss) | 246.2 | ||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (4.5 | ) | |||||||||||||||||||||||||
| Net income (loss) attributable to MCBC | $ | 241.7 |
| (1) | During the third quarter of 2019, we recorded a goodwill impairment loss to our Canada reporting unit of $668.3 million, which was recorded as a special item. See Note 10, "Goodwill and Intangible Assets" for further discussion. During the second quarter of 2019, we completed the sale of our existing Montreal brewery for $96.2 million (CAD 126 million), resulting in a $61.3 million gain, which was recorded as a special item. Also, during 2019 and 2018, we recorded unrealized mark-to-market losses of approximately $18 million and $24 million, respectively, on the HEXO Corp. ("HEXO") warrants received in connection with the formation of the Truss LP ("Truss") joint venture. |
| (2) | During the third quarter of 2019, we recorded an aggregate goodwill and definite-lived intangible asset impairment loss related to our India reporting unit of $12.2 million, which was recorded as a special item. See Note 10, "Goodwill and Intangible Assets" for further discussion. |
| (3) | Related to the unrealized mark-to-market valuation on our commodity hedge positions, we recorded unrealized losses of $0.8 million for the year ended December 31, 2019 compared to unrealized losses of $166.2 million for the year ended December 31, 2018. |
| Year ended December 31, 2018 | |||||||||||||||||||||||||||
| U.S. | Canada | Europe | International | Corporate**(1)** | Inter-segment net sales eliminations | Consolidated | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||
| Net sales | $ | 7,259.9 | $ | 1,392.1 | $ | 2,002.6 | $ | 250.1 | $ | 0.8 | $ | (135.9 | ) | $ | 10,769.6 | ||||||||||||
| Interest expense | 8.8 | — | (5.6 | ) | — | (309.4 | ) | — | (306.2 | ) | |||||||||||||||||
| Interest income | — | — | 0.5 | — | 7.5 | — | 8.0 | ||||||||||||||||||||
| Income (loss) before income taxes | $ | 1,320.7 | $ | 157.0 | $ | 186.4 | $ | (2.7 | ) | $ | (301.6 | ) | $ | — | $ | 1,359.8 | |||||||||||
| Income tax benefit (expense) | (225.2 | ) | |||||||||||||||||||||||||
| Net income (loss) | 1,134.6 | ||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (18.1 | ) | |||||||||||||||||||||||||
| Net income (loss) attributable to MCBC | $ | 1,116.5 |
| (1) | During the first quarter of 2018, we recorded a gain of $328.0 million related to the Adjustment Amount as defined and further discussed in Note 7, "Special Items." Additionally, related to the unrealized mark-to-market valuation on our commodity hedge positions, we recorded unrealized losses of $166.2 million for the year ended December 31, 2018 compared to unrealized gains of $123.3 million for the year ended December 31, 2017. |
| Year ended December 31, 2017 | |||||||||||||||||||||||||||
| U.S. | Canada | Europe**(1)** | International | Corporate**(2)** | Inter-segment net sales eliminations | Consolidated | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||
| Net sales | $ | 7,505.7 | $ | 1,458.0 | $ | 1,940.7 | $ | 264.0 | $ | 0.9 | $ | (166.5 | ) | $ | 11,002.8 | ||||||||||||
| Interest expense | 13.1 | — | — | — | (362.4 | ) | — | (349.3 | ) | ||||||||||||||||||
| Interest income | — | — | 3.6 | — | 2.4 | — | 6.0 | ||||||||||||||||||||
| Income (loss) before income taxes | $ | 1,394.2 | $ | 210.2 | $ | 234.9 | $ | (19.7 | ) | $ | (436.4 | ) | $ | — | $ | 1,383.2 | |||||||||||
| Income tax benefit (expense) | 204.6 | ||||||||||||||||||||||||||
| Net income (loss) | 1,587.8 | ||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | (22.2 | ) | |||||||||||||||||||||||||
| Net income (loss) attributable to MCBC | $ | 1,565.6 |
| (1) | During the first quarter of 2017, we released an indirect tax loss contingency, which was initially recorded in the fourth quarter of 2016, for a benefit of approximately $50 million. See Note 18, "Commitments and Contingencies" for details. |
| (2) | Related to the unrealized mark-to-market valuation on our commodity hedge positions, we recorded unrealized gains of $123.3 million for the twelve months ended December 31, 2017. |
The following table presents total assets and select cash flow information by segment:
| Assets | Depreciation and amortization | Capital expenditures | |||||||||||||||||||||||||||||
| As of December 31, | For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||
| U.S. | $ | 18,814.1 | $ | 19,057.1 | $ | 527.4 | $ | 514.0 | $ | 485.7 | $ | 239.5 | $ | 322.0 | $ | 351.5 | |||||||||||||||
| Canada | 4,195.3 | 4,640.5 | 137.1 | 141.9 | 131.2 | 194.8 | 165.3 | 99.9 | |||||||||||||||||||||||
| Europe | 5,413.8 | 5,430.0 | 180.1 | 188.0 | 182.3 | 138.3 | 150.0 | 131.6 | |||||||||||||||||||||||
| International | 265.9 | 274.1 | 11.0 | 9.9 | 9.6 | 11.5 | 3.1 | 2.3 | |||||||||||||||||||||||
| Corporate | 170.7 | 708.1 | 3.4 | 3.7 | 4.0 | 9.7 | 11.3 | 14.3 | |||||||||||||||||||||||
| Consolidated | $ | 28,859.8 | $ | 30,109.8 | $ | 859.0 | $ | 857.5 | $ | 812.8 | $ | 593.8 | $ | 651.7 | $ | 599.6 |
The following table presents net sales by geography, based on the location of the customer:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Net sales to unaffiliated customers: | |||||||||||
| United States and its territories | $ | 7,244.9 | $ | 7,272.1 | $ | 7,493.6 | |||||
| Canada | 1,231.3 | 1,298.2 | 1,358.4 | ||||||||
| United Kingdom | 1,119.1 | 1,184.6 | 1,172.8 | ||||||||
| Other foreign countries(1) | 984.1 | 1,014.7 | 978.0 | ||||||||
| Consolidated net sales | $ | 10,579.4 | $ | 10,769.6 | $ | 11,002.8 |
| (1) | Reflects net sales from the individual countries within our Central European operations (included in our Europe segment), as well as our International segment, for which no individual country has total net sales exceeding 10% of the total consolidated net sales. |
The following table presents net properties by geographic location:
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Net properties: | |||||||
| United States and its territories | $ | 2,760.2 | $ | 2,943.0 | |||
| Canada | 831.9 | 719.7 | |||||
| United Kingdom | 406.5 | 396.5 | |||||
| Other foreign countries(1) | 547.9 | 549.1 | |||||
| Consolidated net properties | $ | 4,546.5 | $ | 4,608.3 |
| (1) | Reflects net properties within the individual countries included in our Central European operations (included in our Europe segment), as well as our International segment, for which no individual country has total net properties exceeding 10% of the total consolidated net properties. |
4. Investments
Our investments include both equity method and consolidated investments. Those entities identified as VIEs have been evaluated to determine whether we are the primary beneficiary. The VIEs included under "Consolidated VIEs" below are those for which we have concluded that we are the primary beneficiary and accordingly, we have consolidated these entities. None of our consolidated VIEs held debt as of December 31, 2019 or December 31, 2018. We have not provided any financial support to any of our VIEs during 2019 that we were not previously contractually obligated to provide. Amounts due to and due from
our equity method investments are recorded as affiliate accounts payable and affiliate accounts receivable. See below under "Affiliate Transactions" for further details.
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. Our consolidated VIEs are Cobra Beer Partnership, Ltd. ("Cobra U.K."), Rocky Mountain Metal Container (“RMMC”), Rocky Mountain Bottle Company (“RMBC”) and Truss. Our unconsolidated VIEs are BRI and BDL, as well as other immaterial investments.
Both BRI and BDL have outstanding third-party debt which is guaranteed by their respective shareholders. As a result, we have a guarantee liability of $37.7 million and $35.9 million recorded as of December 31, 2019 and December 31, 2018, respectively, which is presented within accounts payable and other current liabilities on the consolidated balance sheets and represents our proportionate share of the outstanding balance of these debt instruments. The carrying value of the guarantee liability equals fair value, which considers an adjustment for our own non-performance risk and is considered a Level 2 measurement. The offset to the guarantee liability was recorded as an adjustment to our respective equity method investment within the consolidated balance sheets. The resulting change in our equity method investments during the year due to movements in the guarantee represents a non-cash investing activity.
Equity Method Investments
Brewers' Retail Inc.
BRI is a beer distribution and retail network for the Ontario region of Canada, with majority of the ownership residing with MCC, Labatt Breweries of Canada LP (a subsidiary of ABI) and Sleeman Breweries Ltd. (a subsidiary of Sapporo International). BRI charges its owners administrative fees that are designed so the entity operates on a cash neutral basis. This administrative fee is based on costs incurred, net of other revenues earned, and is allocated in accordance with the operating agreement to its owners based on volume of products. Contractual provisions cause participation in governance and other interests to fluctuate based on this calculated market share requiring frequent primary beneficiary evaluations. However, based on the existing structure, control is shared, and remains shared through such changes, and therefore we do not anticipate becoming the primary beneficiary in the foreseeable future. We consider BRI an affiliate. See "Affiliate Transactions" section below summarizing our transactions and balances with affiliates, including BRI.
We have an obligation to proportionately fund BRI's operations. As a result of this obligation, we continue to record our proportional share of BRI's net income or loss and OCI activity, including when we have a negative equity method balance. As of December 31, 2019 and December 31, 2018, we had a positive equity method investment balance of $27.2 million and $13.8 million, respectively. The increase to our net investment balance from prior year was primarily related to our share of the accelerated recognition of deferred gains on BRI's non-qualifying and other sale-leaseback transactions upon the adoption of the new lease accounting standard as of January 1, 2019, as discussed in Note 2, "New Accounting Pronouncements." This increase was partially offset by our share of BRI's net loss during the year as well as an increase to BRI's employee retirement plan obligations (resulting from the annual actuarial valuation) unfavorably impacting the net assets of BRI. See "Affiliate Transactions" below for BRI affiliate transactions including administrative fees charged to MCBC under the agreement with BRI which are recorded in cost of goods sold, as well as for BRI affiliate due to and due from balances as of December 31, 2019 and December 31, 2018, respectively, related to trade receivables and payables for sales to external customers and costs incurred by BRI offset by administrative fees charged and paid by MCBC (which may be in a payable or receivable position depending on the amount under or over charged).
Brewers' Distributor Ltd.
BDL is a distribution operation owned by MCC and Labatt Breweries of Canada LP (a subsidiary of ABI) that, pursuant to an operating agreement, acts as an agent for the distribution of their products in the western provinces of Canada. The two owners share 50% - 50% voting control of this business. We consider BDL an affiliate. See "Affiliate Transactions" section below summarizing our transactions and balances with affiliates, including BDL.
BDL charges the owners administrative fees that are designed so the entity operates at break-even profit levels. This administrative fee is based on costs incurred, net of other revenues earned, and is allocated in accordance with the operating agreement to the owners based on volume of products. No other parties are allowed to sell beer through BDL, which does not take legal title to the beer distributed for the owners. Our investment in BDL was $30.0 million as of both December 31, 2019 and December 31, 2018. See "Affiliate Transactions" section below for BDL affiliate transactions including administrative fees charged to MCBC under the agreement with BDL which are recorded in cost of goods sold, as well as for BDL affiliate due to and due from balances as of December 31, 2019 and December 31, 2018, respectively, related to trade receivables and payables
for sales to external customers and costs incurred by BDL offset by administrative fees charged and paid by MCBC (which may be in a payable or receivable position depending on the amount under or over charged).
Other
We have certain other immaterial equity investments we enter into from time to time that align with our organizational strategies and growth initiatives.
Our equity method investments are not considered significant for disclosure of financial information on either an individual or aggregated basis and there were no significant undistributed earnings as of December 31, 2019 or December 31, 2018, for any of these companies.
Affiliate Transactions
All transactions with our equity method investments are considered related party transactions and recorded within our affiliate accounts. The following table summarizes transactions with affiliates:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Administrative fees, net charged from BRI | $ | 96.8 | $ | 94.0 | $ | 93.5 | |||||
| Administrative fees, net charged from BDL | $ | 35.7 | $ | 40.2 | $ | 37.3 |
Amounts due to and due from affiliates as of December 31, 2019 and December 31, 2018, respectively, are as follows:
| Amounts due from affiliates | Amounts due to affiliates | ||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||||||||||
| (In millions) | |||||||||||||||
| BRI | $ | 4.6 | $ | 7.7 | $ | — | $ | — | |||||||
| BDL | 4.0 | 0.7 | — | — | |||||||||||
| Other | 0.3 | — | — | 0.1 | |||||||||||
| Total | $ | 8.9 | $ | 8.4 | $ | — | $ | 0.1 |
Consolidated VIEs
Rocky Mountain Metal Container
RMMC, a Colorado limited liability company, is a joint venture with Ball Corporation in which we hold a 50% interest. Our U.S. business has a can and end supply agreement with RMMC. Under this agreement, we purchase substantially all of the output of RMMC. RMMC manufactures cans and ends at our facilities, which RMMC is operating under a use and license agreement. As RMMC is a limited liability company (“LLC”), the tax consequences flow to the joint venture partners.
Rocky Mountain Bottle Company
RMBC, a Colorado limited liability company, is a joint venture with Owens-Brockway Glass Container, Inc. in which we hold a 50% interest. Our U.S. business has a supply agreement with RMBC under which we agree to purchase output approximating the agreed upon annual plant capacity of RMBC. RMBC manufactures bottles at our facilities, which RMBC is operating under a lease agreement. As RMBC is an LLC, the tax consequences flow to the joint venture partners.
Cobra U.K.
We hold a 50.1% interest in Cobra U.K., which owns the worldwide rights to the Cobra beer brand (with the exception of the Indian sub-continent, owned by Cobra India). The noncontrolling interest is held by the founder of the Cobra beer brand. We consolidate the results and financial position of Cobra U.K., and it is reported within our Europe operating segment.
Truss
On October 4, 2018, a wholly-owned subsidiary within our Canadian business completed the formation of Truss LP, an independent Canadian joint venture with HEXO to pursue opportunities to develop, produce and market non-alcoholic,
cannabis-infused beverages in Canada. Truss is structured as a standalone start-up company with its own board of directors and an independent management team. We maintain a 57.5% controlling interest in Truss, which is a VIE that is consolidated. In connection with the formation of Truss, HEXO also issued warrants to our Canadian subsidiary, which are further discussed in Note 16, "Derivative Instruments and Hedging Activities." Truss also subleases the location of its production facility in Belleville, Ontario from HEXO.
The following summarizes the assets and liabilities of our consolidated VIEs (including noncontrolling interests):
| As of | |||||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||
| Total Assets | Total Liabilities | Total Assets | Total Liabilities | ||||||||||||
| (In millions) | |||||||||||||||
| RMMC/RMBC | $ | 207.4 | $ | 17.9 | $ | 189.8 | $ | 35.0 | |||||||
| Other | $ | 65.3 | $ | 20.8 | $ | 31.0 | $ | 5.1 |
Grolsch Deconsolidation
In September 2019, we received termination notices of our Grolsch U.K. Ltd. ("Grolsch") joint venture arrangement, as well as the related brewing and distribution agreements for the Grolsch brands in the U.K. and Ireland. In November 2019, we mutually agreed with Asahi that the agreements would terminate with immediate effect and that we would receive a payment in November 2019. As a result, the Grolsch joint venture ceased all operations, including the production, marketing and sale of the Grolsch brands in these markets, in the third quarter of 2019. Upon notice of termination in the third quarter of 2019, we reassessed our status as the primary beneficiary of the joint venture and concluded that we were no longer able to exert control over the operations or direction of the joint venture or otherwise influence the activities that most significantly impact the economics of the entity. Therefore, we deconsolidated the joint venture and recorded an immaterial loss on deconsolidation as a special item during the third quarter of 2019. The aggregate loss related to the termination of the Grolsch business, resulting from the loss upon deconsolidation and the impairment losses on the related definite-lived intangible assets in the third quarter of 2019, along with the payment we received and recorded in the fourth quarter of 2019, is $0.5 million for fiscal year 2019.
5. Other Income and Expense
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Gain on sale of non-operating asset | $ | — | $ | 11.7 | $ | — | |||||
| Gain (loss) from other foreign exchange and derivative activity, net | (20.4 | ) | (31.9 | ) | (8.0 | ) | |||||
| Other, net(1) | 5.7 | 8.2 | 9.4 | ||||||||
| Other income (expense), net | $ | (14.7 | ) | $ | (12.0 | ) | $ | 1.4 |
| (1) | During 2019, we received a payment and recorded a gain of CAD 2.0 million, or $1.5 million, resulting from a purchase price agreement related to the historical sale of Molson Inc.'s ownership interest in the Montreal Canadiens, which is considered an affiliate of MCBC. |
During 2018, we recorded a non-cash gain of CAD 5.8 million, or $4.3 million, resulting from the release of our guarantee of the Montreal Canadiens' obligations under a ground lease for the Bell Centre Arena as a result of an independent transaction by the Montreal Canadiens with the lessor.
During 2017, we received payment and recorded a gain of CAD 10.9 million, or $8.3 million, resulting from a purchase price adjustment related to the historical sale of Molson Inc.’s ownership interest in the Montreal Canadiens, an affiliate of MCBC.
6. Income Tax
Our income (loss) before income taxes on which the provision for income taxes was computed is as follows:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Domestic | $ | 1,136.1 | $ | 1,320.4 | $ | 1,488.3 | |||||
| Foreign | (656.2 | ) | 39.4 | (105.1 | ) | ||||||
| Total | $ | 479.9 | $ | 1,359.8 | $ | 1,383.2 |
Income tax expense (benefit) includes the following current and deferred provisions:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Current: | |||||||||||
| Federal | $ | 69.1 | $ | (22.9 | ) | $ | (177.1 | ) | |||
| State | 9.4 | (4.7 | ) | 4.7 | |||||||
| Foreign | 46.7 | 38.7 | 36.5 | ||||||||
| Total current tax expense (benefit) | $ | 125.2 | $ | 11.1 | $ | (135.9 | ) | ||||
| Deferred: | |||||||||||
| Federal | $ | 128.3 | $ | 232.2 | $ | (79.5 | ) | ||||
| State | 22.2 | 31.2 | 33.5 | ||||||||
| Foreign | (42.0 | ) | (49.3 | ) | (22.7 | ) | |||||
| Total deferred tax expense (benefit) | $ | 108.5 | $ | 214.1 | $ | (68.7 | ) | ||||
| Total income tax expense (benefit) | $ | 233.7 | $ | 225.2 | $ | (204.6 | ) |
The increase in income tax expense for 2018 versus 2017 was primarily driven by net deferred tax benefit of approximately $567 million recognized in 2017 resulting from the impacts of the 2017 Tax Act, partially offset by the impact of the reduction of the U.S. federal corporate income tax rate from 35% to 21% in 2018.
Our effective tax rate varies from the U.S. federal statutory income tax rate as follows:
| For the years ended | ||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||
| Statutory Federal income tax rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| State income taxes, net of federal benefits | 3.4 | % | 1.4 | % | 2.2 | % | ||
| Effect of foreign tax rates and tax planning | (21.2 | )% | (8.1 | )% | (16.5 | )% | ||
| Effect of U.S. tax reform | — | % | 0.2 | % | (41.0 | )% | ||
| Effect of unrecognized tax benefits | 3.7 | % | 0.8 | % | (0.3 | )% | ||
| Change in valuation allowance | 6.0 | % | 0.7 | % | 3.6 | % | ||
| Goodwill impairment | 36.5 | % | — | % | — | % | ||
| Other, net | (0.7 | )% | 0.6 | % | 2.2 | % | ||
| Effective tax rate | 48.7 | % | 16.6 | % | (14.8 | )% |
The increase in the effective income tax rate for 2019 versus 2018 is primarily driven by the $668.3 million impairment loss attributable to nondeductible goodwill of our Canada reporting unit, increased valuation allowances, the recognition of other one-time tax expenses in 2019, as well as cycling one-time tax benefits in 2018.
The increase in the effective income tax rate for 2018 versus 2017 was primarily driven by the one-time impacts of the 2017 Tax Act recognized when enacted in 2017, most notably the remeasurement of our deferred taxes from the reduction in the U.S. statutory federal corporate income tax rate.
Additionally, our foreign businesses operate in jurisdictions with statutory income tax rates that differ from the U.S. Federal statutory rate. Specifically, the statutory income tax rates in the countries in Europe in which we operate range from 9% to 25%, and Canada has a statutory income tax rate of approximately 26%.
Separately, since 2018, the U.S. Department of Treasury has continued to issue proposed, temporary and final regulations to implement provisions of the 2017 Tax Act. We have continued to monitor these and while temporary and final regulations have not yet resulted in material adverse impacts to us, there are certain proposed regulations, which are not yet considered law, that if finalized as proposed, could result in a material adverse impact on our consolidated financial statements. Specifically, if certain of the proposed regulations are finalized as proposed with full retroactive application to January 1, 2018, then we would be required to recognize estimated income tax expense of approximately $100 million to $200 million upon enactment related to the proposed retroactive period through December 31, 2019, for fiscal years 2018 and 2019. This estimated range contains significant uncertainty and could be impacted by various factors, including any differences between the proposed and ultimately finalized regulations.
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Non-current deferred tax assets: | |||||||
| Compensation-related obligations | $ | 54.8 | $ | 55.8 | |||
| Pension and postretirement benefits | 115.9 | 121.4 | |||||
| Foreign exchange gain/loss | 1.8 | — | |||||
| Derivative instruments | 41.8 | 8.9 | |||||
| Tax credit carryforwards | 41.1 | 54.5 | |||||
| Tax loss carryforwards | 267.1 | 1,201.8 | |||||
| Accrued liabilities and other | 48.3 | 76.2 | |||||
| Valuation allowance | (73.8 | ) | (1,040.0 | ) | |||
| Total non-current deferred tax assets | $ | 497.0 | $ | 478.6 | |||
| Non-current deferred tax liabilities: | |||||||
| Fixed assets | 353.7 | 345.8 | |||||
| Partnerships and investments | 18.8 | 17.0 | |||||
| Foreign exchange gain/loss | — | 3.0 | |||||
| Intangible assets | 2,279.9 | 2,167.1 | |||||
| Total non-current deferred tax liabilities | $ | 2,652.4 | $ | 2,532.9 | |||
| Net non-current deferred tax assets | — | — | |||||
| Net non-current deferred tax liabilities | $ | 2,155.4 | $ | 2,054.3 |
The overall increase in net deferred tax liabilities of $101.1 million in 2019 is primarily attributable to the amortization of goodwill and indefinite-lived intangible assets resulting from the Acquisition for U.S. tax purposes. Additionally, our deferred tax balances are also impacted by foreign exchange rates, as a significant amount of our deferred tax assets and liabilities are in foreign jurisdictions.
Our deferred tax valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards from operations in various jurisdictions. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that the deferred tax assets will not be realized. We have evaluated the realizability of our deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results and the availability of prudent and feasible tax planning strategies. Based on this analysis, we have determined that the valuation allowances recorded in each period presented are appropriate.
We have deferred tax assets for U.S. tax carryforwards that expire between 2020 and 2039 of $63.2 million and $76.7 million as of December 31, 2019 and December 31, 2018, respectively. We have foreign tax loss carryforwards that expire between 2020 and 2039 of $233.8 million and $195.0 million as of December 31, 2019 and December 31, 2018, respectively. We have foreign tax loss carryforwards that do not expire of $11.2 million and $984.6 million as of December 31, 2019 and December 31, 2018, respectively.
The significant year over year decrease in our deferred tax valuation allowances as well as our tax loss carryforwards that do not expire is attributable to the liquidation of certain European entities, resulting in the write-off of their loss carryforwards and associated full valuation allowances. As a result, these write-offs did not have an impact to the consolidated statement of operations, balance sheet and statement of cash flows.
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Domestic net non-current deferred tax liabilities | $ | 1,488.5 | $ | 1,353.2 | |||
| Foreign net non-current deferred tax assets | 34.8 | 26.8 | |||||
| Foreign net non-current deferred tax liabilities | 701.7 | 727.9 | |||||
| Net non-current deferred tax liabilities | $ | 2,155.4 | $ | 2,054.3 |
The 2019 and 2018 amounts above exclude $68.4 million and $47.8 million, respectively, of unrecognized tax benefits that have been recorded as a reduction of non-current deferred tax assets, which is presented within non-current deferred tax liabilities due to jurisdictional netting on the consolidated balance sheets.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Balance at beginning of year | $ | 51.6 | $ | 41.9 | $ | 39.7 | |||||
| Additions for tax positions related to the current year | 18.1 | 22.3 | 13.5 | ||||||||
| Additions for tax positions of prior years | — | 0.7 | 13.6 | ||||||||
| Reductions for tax positions of prior years | — | (8.4 | ) | — | |||||||
| Settlements | — | — | (12.8 | ) | |||||||
| Release due to statute expirations | (0.8 | ) | (1.6 | ) | (14.6 | ) | |||||
| Foreign currency adjustment | 3.5 | (3.3 | ) | 2.5 | |||||||
| Balance at end of year | $ | 72.4 | $ | 51.6 | $ | 41.9 |
Our remaining unrecognized tax benefits as of December 31, 2019, relate to tax years that are currently open to examination. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues may differ materially from the amount accrued.
During 2020, we anticipate that an immaterial amount of unrecognized tax benefits will be released due to closings of statutes of limitations.
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Reconciliation of unrecognized tax benefits balance | |||||||||||
| Estimated interest and penalties | $ | 2.9 | $ | 2.3 | $ | 2.1 | |||||
| Unrecognized tax positions | 72.4 | 51.6 | 41.9 | ||||||||
| Total unrecognized tax benefits | $ | 75.3 | $ | 53.9 | $ | 44.0 | |||||
| Presented net against non-current deferred tax assets | $ | 68.4 | $ | 47.8 | $ | 37.9 | |||||
| Current (included in accounts payable and other current liabilities) | — | — | — | ||||||||
| Non-current (included within other liabilities) | 6.9 | 6.1 | 6.1 | ||||||||
| Total unrecognized tax benefits | $ | 75.3 | $ | 53.9 | $ | 44.0 | |||||
| Amount of unrecognized tax benefits that would impact the effective tax rate, if recognized(1) | $ | 72.4 | $ | 51.6 | $ | 41.9 |
| (1) | Amounts exclude the potential effects of valuation allowances, which may fully or partially offset the impact to the effective tax rate. |
We file income tax returns in most of the federal, state and provincial jurisdictions in the U.S., Canada and various countries in Europe. Tax years through 2013 are closed in the U.S. In Canada, tax years through the year ended 2014 are closed or have been effectively settled through examination except for issues relating to intercompany cross-border transactions. The statute of limitations for intercompany cross-border transactions is closed through tax year 2011. Tax years through 2013 are closed for most countries in European jurisdictions with statutes of limitations varying from 3 to 7 years.
We annually distribute cash from our foreign subsidiaries’ current year earnings and record the tax impacts associated with these transactions. Any current earnings not otherwise distributed or planned to be distributed in the current year are considered permanently reinvested in our foreign operations. The aggregate of these earnings is currently a deficit for U.S. tax purposes and would not result in any material taxes, if distributed. We have no plans to dispose of foreign subsidiaries and would not expect outside basis differences in foreign subsidiaries to reverse with material tax consequences.
7. Special Items
We have incurred charges or realized benefits that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification. As such, we have separately classified these charges (benefits) as special items.
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Employee-related charges | |||||||||||
| Restructuring | $ | 52.4 | $ | 34.7 | $ | 2.6 | |||||
| Impairments or asset abandonment charges | |||||||||||
| U.S. - Asset abandonment(1) | 15.8 | 8.2 | 14.5 | ||||||||
| Canada - Goodwill impairment(2) | 668.3 | — | — | ||||||||
| Canada - Asset abandonment(3) | 23.0 | 24.5 | 14.4 | ||||||||
| Europe - Asset abandonment(4) | 1.2 | 3.8 | 9.5 | ||||||||
| International - Goodwill and intangible asset impairment(2) | 12.2 | — | — | ||||||||
| Corporate | 3.4 | — | — | ||||||||
| Termination fees and other (gains) losses | |||||||||||
| U.S. - Gain on sale of asset | (7.5 | ) | — | — | |||||||
| Canada - Gain on sale of brewery(3) | (61.3 | ) | — | — | |||||||
| Europe - Deconsolidation of VIE | 0.5 | — | — | ||||||||
| Europe - Gain on sale of asset(4) | — | — | (4.6 | ) | |||||||
| International(5) | 0.8 | 7.1 | — | ||||||||
| Purchase price adjustment settlement gain(6) | — | (328.0 | ) | — | |||||||
| Total Special items, net | $ | 708.8 | $ | (249.7 | ) | $ | 36.4 |
| (1) | Following management approval in December 2019, in January 2020, we announced plans to cease production at our Irwindale, California brewery and entered into an option agreement with Pabst Brewing Company, LLC ("Pabst"), granting Pabst an option to purchase our Irwindale, California brewery, including plant equipment and machinery and the underlying land. |
Pursuant to the agreement, Pabst will have 120 days from receipt of the notice of the Irwindale brewery closure from MillerCoors to exercise the option to purchase the Irwindale brewery. If Pabst exercises its option to purchase the Irwindale brewery, the agreement provides (i) the purchase price will be $150 million, subject to adjustment as further specified in the agreement, (ii) the closing will be within six months from Pabst’s exercise of the option, but no earlier than September 1, 2020 and no later than December 31, 2020, subject to the satisfaction of certain customary closing conditions, (iii) for the treatment and allocation of certain liabilities related to the operation of the Irwindale brewery prior to closing, and (iv) for customary representations and warranties and certain post-closing restrictions on Pabst regarding the operations and disposal of the Irwindale brewery. In conjunction with the agreement, MillerCoors and Pabst also executed mutual releases of claims related to their ongoing litigation and agreed to dismiss the litigation with prejudice.
Charges for 2019 consist primarily of accelerated depreciation in excess of normal depreciation and other closure costs, and we will continue to incur special charges during each reporting period through the planned closure of the brewery in September 2020. Total special charges associated with the planned closure are expected to be approximately $150 million to $175 million, consisting primarily of accelerated depreciation charges. However, this estimated range contains significant uncertainty, and actual results could differ materially from these estimates due to uncertainty regarding the ultimate net cost associated with the disposition of assets, restructuring charges, as well as the overall outcome of the Pabst purchase option, which if exercised, could significantly impact these estimates.
Charges for 2018 consist primarily of accelerated depreciation in excess of normal depreciation related to the closure of the Colfax, California cidery, which was completed during the first quarter of 2019, as well as other costs associated with the previously closed Eden, North Carolina brewery, including net charges associated with the sale of the Eden real property. Charges for 2017 also relate to the Eden brewery closure.
| (2) | During the third quarter of 2019, we recorded goodwill impairment losses within our Canada and India reporting units of $668.3 million and $6.1 million, respectively. We also recorded impairment losses related to definite-lived intangible assets in India of $6.1 million. See Note 10, "Goodwill and Intangible Assets" for further discussion. |
| (3) | During 2019, 2018 and 2017, we incurred asset abandonment charges, consisting primarily of accelerated depreciation in excess of normal depreciation related to the closure of the Vancouver brewery, which occurred in the third quarter of 2019, and the planned closure of the Montreal brewery, which is currently expected to occur in 2021. We currently expect to incur additional charges, including estimated accelerated depreciation charges in excess of normal depreciation of approximately CAD 27 million, through final closure of the Montreal brewery. However, due to the uncertainty inherent in our estimates, these estimated future accelerated depreciation charges as well as the timing of the brewery closure are subject to change. Additionally, during the second quarter of 2019, we completed the sale of the existing Montreal brewery property for $96.2 million (CAD 126 million), and recognized a gain of $61.3 million. See Note 19, "Leases" for further discussion. |
| (4) | As a result of our continued strategic review of our European supply chain network, during 2019, 2018 and 2017, we incurred charges consisting primarily of accelerated depreciation in excess of normal depreciation related to the closure of our Burton South brewery and other associated closure costs. The Burton South Brewery closed during the first quarter of 2018. Additionally, as part of this review, related to the closures of our Plovdiv brewery in Bulgaria and Alton brewery in the U.K., during 2018 and 2017, we recorded asset abandonment related special charges. Separately, during 2017 we completed the sale of land related to our previously closed Plovdiv brewery and received net cash proceeds of $8.2 million and recognized a gain of $4.6 million. |
| (5) | Represents charges related to the exit of our China business in 2018, consisting primarily of the reclassification of the associated cumulative foreign currency translation adjustment from AOCI upon substantial liquidation in the fourth quarter of 2018. See Note 14, "Accumulated Other Comprehensive Income (Loss)" for further details. |
| (6) | During the first quarter of 2018, we received $330.0 million from ABI, of which $328.0 million constituted a purchase price adjustment (the "Adjustment Amount"), related to the Miller International Business which was acquired in our acquisition of the remaining portion of MillerCoors which occurred on October 11, 2016. As this settlement occurred following the finalization of purchase accounting, we recorded the settlement proceeds related to the Adjustment Amount as a gain within special items, net in our consolidated statement of operations in our Corporate segment and within cash provided by operating activities in our consolidated statement of cash flows for the year ended December 31, 2018. |
Restructuring Activities
On October 28, 2019, as part of our revitalization plan, we made the determination to establish Chicago, Illinois as our North American operational headquarters, close our existing office in Denver, Colorado and consolidate certain administrative functions into our other existing office locations. In connection with these consolidation activities, certain impacted employees have been extended an opportunity to continue their employment with the company in the new organization and locations and, for those not continuing with the company, certain of such employees have been asked to provide transition assistance and offered severance and retention packages in connection with their termination of service. The company expects the costs associated with the restructuring to be substantially recognized by the end of fiscal year 2021. After taking into account all changes in each of the business units, including Europe, the plan is expected to reduce employment levels, in aggregate, by approximately 500 to 600 employees globally.
In connection with these consolidation activities and related organizational and personnel changes, we currently expect to incur certain cash and non-cash restructuring charges related to employee relocation, severance, retention and transition costs, non-cash asset related costs, lease exit costs in connection with our office lease in Denver, Colorado, and other transition activities estimated in the range of approximately $120 million to $180 million in the aggregate, the majority of which will be cash charges that we began recognizing in the fourth quarter of 2019, and will be further spread through the balance of fiscal years 2020 and 2021. In 2019, we recognized aggregate impairment losses of $2.1 million related to the closure of the Denver, Colorado office facility, including a $1.1 million impairment of the associated lease right-of-use asset. Additionally, in 2019 we recognized severance and retention charges of $41.2 million, of which, approximately $40 million remained accrued as of December 31, 2019. Actual severance and retention costs related to this restructuring, which are primarily being recognized ratably over the employees’ required future service period, may differ from original estimates based on actual employee turnover levels prior to achieving severance and retention eligibility requirements. Employee relocation charges are recognized in the period incurred and were immaterial in 2019.
Separately, during the third quarter of 2018, we initiated global restructuring activities primarily in the U.S. in order to align our cost base with our scale of business. As a result, we reduced U.S. employment levels by approximately 300 employees
in the fourth quarter of 2018. Severance costs related to these restructuring activities were recorded as special items in our consolidated statements of operations.
We continually evaluate our cost structure and seek opportunities for further efficiencies and cost savings as part of ongoing and new initiatives. As such, we may incur additional restructuring related charges or adjustments to previously recorded charges in the future, however, we are unable to estimate the amount of charges at this time.
The accrued restructuring balances as of December 31, 2019 represent expected future cash payments required to satisfy our remaining obligations, the majority of which we expect to be paid in the next 12 months.
| U.S. | Canada | Europe | International | Corporate | Total | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Balance as of December 31, 2016 | $ | 5.1 | $ | 5.9 | $ | 2.8 | $ | 0.2 | $ | 0.7 | $ | 14.7 | |||||||||||
| Charges incurred and changes in estimates | 0.8 | — | 0.1 | 1.6 | 0.1 | 2.6 | |||||||||||||||||
| Payments made | (5.3 | ) | (1.9 | ) | (1.3 | ) | (1.6 | ) | (0.8 | ) | (10.9 | ) | |||||||||||
| Foreign currency and other adjustments | — | 0.3 | 0.2 | — | — | 0.5 | |||||||||||||||||
| Balance as of December 31, 2017 | $ | 0.6 | $ | 4.3 | $ | 1.8 | $ | 0.2 | $ | — | $ | 6.9 | |||||||||||
| Charges incurred and changes in estimates | 29.6 | (0.7 | ) | 2.2 | 2.2 | 1.4 | 34.7 | ||||||||||||||||
| Payments made | (8.6 | ) | (2.0 | ) | (3.3 | ) | (1.8 | ) | (0.1 | ) | (15.8 | ) | |||||||||||
| Foreign currency and other adjustments | — | (0.1 | ) | (0.1 | ) | — | — | (0.2 | ) | ||||||||||||||
| Balance as of December 31, 2018 | $ | 21.6 | $ | 1.5 | $ | 0.6 | $ | 0.6 | $ | 1.3 | $ | 25.6 | |||||||||||
| Charges incurred and changes in estimates | 18.3 | 10.4 | 9.0 | 2.5 | 12.2 | 52.4 | |||||||||||||||||
| Payments made | (23.3 | ) | (0.6 | ) | (5.1 | ) | (0.7 | ) | (1.4 | ) | (31.1 | ) | |||||||||||
| Foreign currency and other adjustments | — | 0.2 | — | — | — | 0.2 | |||||||||||||||||
| Balance as of December 31, 2019 | $ | 16.6 | $ | 11.5 | $ | 4.5 | $ | 2.4 | $ | 12.1 | $ | 47.1 |
8. Stockholders' Equity
Changes to the number of shares of capital stock issued were as follows:
| Common stock issued | Exchangeable shares issued | ||||||||||
| Class A | Class B | Class A | Class B | ||||||||
| (Share amounts in millions) | |||||||||||
| Balance as of December 31, 2016 | 2.6 | 203.7 | 2.9 | 15.2 | |||||||
| Shares issued under equity compensation plans | — | 0.5 | — | — | |||||||
| Shares exchanged for common stock | — | 0.5 | — | (0.5 | ) | ||||||
| Balance as of December 31, 2017 | 2.6 | 204.7 | 2.9 | 14.7 | |||||||
| Shares issued under equity compensation plans | — | 0.7 | — | — | |||||||
| Shares exchanged for Class B exchangeable shares | — | — | (0.1 | ) | 0.1 | ||||||
| Balance as of December 31, 2018 | 2.6 | 205.4 | 2.8 | 14.8 | |||||||
| Shares issued under equity compensation plans | — | 0.2 | — | — | |||||||
| Shares exchanged for common stock | — | 0.1 | — | (0.1 | ) | ||||||
| Shares exchanged for Class B exchangeable shares | — | — | (0.1 | ) | 0.1 | ||||||
| Balance as of December 31, 2019 | 2.6 | 205.7 | 2.7 | 14.8 |
Exchangeable Shares
The Class A exchangeable shares and Class B exchangeable shares were issued by Molson Coors Canada Inc. ("MCCI"), a wholly-owned subsidiary of the Company. The exchangeable shares are substantially the economic equivalent of the corresponding shares of Class A and Class B common stock that a Molson shareholder would have received in the merger of Adolph Coors Company with Molson Inc. in February 2005, if the holder had elected to receive shares of Molson Coors
common stock. Exchangeable shareholders receive the CAD equivalent of dividends declared on Class A and B common stock on the date of declaration. Holders of exchangeable shares also receive, through a voting trust, the benefit of Molson Coors voting rights, entitling the holder to one vote on the same basis and in the same circumstances as one corresponding share of Molson Coors common stock.
Voting Rights
Each holder of record of Class A common stock, Class B common stock, Class A exchangeable shares and Class B exchangeable shares is entitled to one vote for each share held, without the ability to cumulate votes on the election of directors. Our Class B common stock has fewer voting rights than our Class A common stock and holders of our Class A common stock have the ability to effectively control or have a significant influence over company actions requiring stockholder approval. Specifically, holders of Class B common stock voting together as a single class have the right to elect three directors of the Molson Coors Board of Directors, as well as the right to vote on certain additional matters as outlined in the Restated Certificate of Incorporation (as amended, the “Certificate”), such as merger agreements that require approval under applicable law, sales of all or substantially all of the our assets to unaffiliated third parties, proposals to dissolve MCBC, and certain amendments to the Certificate that require approval under applicable law, each as further described and limited by the Certificate. The Certificate also provides that holders of Class A common stock and Class B common stock shall vote together as a single class, on an advisory basis, on any proposal to approve the compensation of MCBC's named executive officers.
Conversion Rights
The Certificate provides for the right of holders of Class A common stock to convert their stock into Class B common stock on a one-for-one basis at any time. The exchangeable shares are exchangeable at any time, at the option of the holder on a one-for-one basis for corresponding shares of Molson Coors common stock. Therefore, a portion of our authorized and unissued Class A and Class B common shares are reserved to meet exchange requirements.
9. Properties
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Land and improvements | $ | 417.0 | $ | 369.3 | |||
| Buildings and improvements | 1,025.8 | 953.6 | |||||
| Machinery and equipment | 4,540.9 | 4,095.0 | |||||
| Returnable containers | 386.7 | 403.4 | |||||
| Furniture and fixtures | 264.6 | 361.1 | |||||
| Software | 468.1 | 445.0 | |||||
| Natural resource properties | 3.8 | 3.8 | |||||
| Construction in progress | 444.2 | 535.9 | |||||
| Total properties cost | 7,551.1 | 7,167.1 | |||||
| Less: accumulated depreciation | (3,004.6 | ) | (2,558.8 | ) | |||
| Properties, net | $ | 4,546.5 | $ | 4,608.3 |
Depreciation expense was $637.8 million, $633.4 million and $590.7 million in 2019, 2018 and 2017, respectively. Loss and breakage expense related to our returnable containers, included in the depreciation expense amounts noted above, was $48.8 million, $48.4 million and $46.9 million in 2019, 2018 and 2017, respectively, and is classified within cost of goods sold in the consolidated statements of operations. Additionally, the previously mentioned depreciation expense for 2019, 2018 and 2017 includes accelerated depreciation of $31.7 million, $30.7 million and $20.5 million respectively, primarily associated with brewery closures, and is classified within special items in the consolidated statements of operations. See Note 7, "Special Items" for further discussion as well as details around facility closures.
10. Goodwill and Intangible Assets
| U.S. | Canada | Europe | International | Consolidated | |||||||||||||||
| (In millions) | |||||||||||||||||||
| Balance as of December 31, 2017 | $ | 5,928.5 | $ | 932.1 | $ | 1,538.0 | $ | 6.9 | $ | 8,405.5 | |||||||||
| Adjustments to preliminary purchase price allocation | — | (2.8 | ) | — | — | (2.8 | ) | ||||||||||||
| Business acquisition | — | — | 10.3 | — | 10.3 | ||||||||||||||
| Foreign currency translation | — | (72.7 | ) | (78.9 | ) | (0.6 | ) | (152.2 | ) | ||||||||||
| Balance as of December 31, 2018 | $ | 5,928.5 | $ | 856.6 | $ | 1,469.4 | $ | 6.3 | $ | 8,260.8 | |||||||||
| Impairments | — | (668.3 | ) | — | (6.1 | ) | (674.4 | ) | |||||||||||
| Foreign currency translation | — | 29.8 | 15.4 | (0.2 | ) | 45.0 | |||||||||||||
| Balance as of December 31, 2019 | $ | 5,928.5 | $ | 218.1 | $ | 1,484.8 | $ | — | $ | 7,631.4 |
Accumulated impairment losses related to our reporting units with remaining goodwill balances as of December 31, 2019 totals $668.3 million.
The following table presents details of our intangible assets, other than goodwill, as of December 31, 2019:
| Useful life | Gross | Accumulated amortization | Net | ||||||||||
| (Years) | (In millions) | ||||||||||||
| Intangible assets subject to amortization: | |||||||||||||
| Brands | 10 - 50 | $ | 5,036.3 | $ | (865.1 | ) | $ | 4,171.2 | |||||
| License agreements and distribution rights | 15 - 20 | 202.0 | (90.6 | ) | 111.4 | ||||||||
| Other | 3 - 40 | 124.0 | (39.4 | ) | 84.6 | ||||||||
| Intangible assets not subject to amortization: | |||||||||||||
| Brands | Indefinite | 8,172.4 | — | 8,172.4 | |||||||||
| Distribution networks | Indefinite | 778.8 | — | 778.8 | |||||||||
| Other | Indefinite | 337.6 | — | 337.6 | |||||||||
| Total | $ | 14,651.1 | $ | (995.1 | ) | $ | 13,656.0 |
The following table presents details of our intangible assets, other than goodwill, as of December 31, 2018:
| Useful life | Gross | Accumulated amortization | Net | ||||||||||
| (Years) | (In millions) | ||||||||||||
| Intangible assets subject to amortization: | |||||||||||||
| Brands | 10 - 50 | $ | 4,988.0 | $ | (682.4 | ) | $ | 4,305.6 | |||||
| License agreements and distribution rights | 15 - 28 | 220.2 | (95.7 | ) | 124.5 | ||||||||
| Other | 2 - 40 | 129.2 | (32.2 | ) | 97.0 | ||||||||
| Intangible assets not subject to amortization: | |||||||||||||
| Brands | Indefinite | 8,169.9 | — | 8,169.9 | |||||||||
| Distribution networks | Indefinite | 741.8 | — | 741.8 | |||||||||
| Other | Indefinite | 337.6 | — | 337.6 | |||||||||
| Total | $ | 14,586.7 | $ | (810.3 | ) | $ | 13,776.4 |
The changes in the gross carrying amounts of intangible assets from December 31, 2018 to December 31, 2019 are driven, in part, by the impairment losses recognized during the third quarter of 2019 related to the Grolsch brand and distribution agreement definite-lived intangible assets discussed in Note 4, "Investments" and the brand intangible asset related to our India business discussed below, along with the impact of foreign exchange rates, as a significant amount of intangible assets are denominated in foreign currencies.
Based on foreign exchange rates as of December 31, 2019, the estimated future amortization expense of intangible assets is as follows:
| Year | Amount | |||
| (In millions) | ||||
| 2020 | $ | 216.7 | ||
| 2021 | 210.5 | |||
| 2022 | 208.4 | |||
| 2023 | 205.4 | |||
| 2024 | 205.4 |
Amortization expense of intangible assets was $221.2 million, $224.1 million, and $222.1 million for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, respectively. This expense is primarily presented within marketing, general and administrative expenses in our consolidated statements of operations.
Interim Impairment Assessment
We identified a triggering event requiring an interim impairment assessment of the goodwill within our Canada reporting unit at the end of the third quarter of 2019, which resulted in a goodwill impairment loss of $668.3 million. The goodwill impairment trigger was the result of continued challenges and steepening declines within the Canadian beer industry reflected in the prolonged weakened performance of the Canada reporting unit through the third quarter of 2019. These performance headwinds have been countered, in part, by the benefit of the recent interest rate environment, which resulted in a decrease in the risk-free rate included in our current year discount rate calculations. Specifically, the discount rate used in developing our interim fair value estimate for the Canada reporting unit was 8.50%, as compared to 9.25% used as of the October 1, 2018 annual testing date. However, the performance declines and increased challenges within the beer industry in Canada, coupled with significant increases in cost inflation, volume deleverage, and resulting margin erosion, has had a material adverse impact on the expected future cash flows utilized in the valuation approaches for the Canada reporting unit, such that it was determined that the fair value of the reporting unit was more likely than not reduced below its carrying amount during the third quarter of 2019. As a result of this triggering event, we performed an interim quantitative analysis, using a combination of discounted cash flow analyses and market-based approaches, consistent with our annual impairment testing, in which it was determined that the carrying value of the Canada reporting unit exceeded its fair value by $668.3 million.
We also evaluated the indefinite-lived and definite-lived intangible assets within our Canada reporting unit, prior to recording the goodwill impairment, and concluded that no impairments were required; however, the Coors Light distribution agreement indefinite-lived intangible asset is considered to be at risk of future impairment as further discussed below.
Separately, during the third quarter of 2019 we also identified an interim triggering event related to goodwill within our India reporting unit resulting from significant declines in performance in the current year, coupled with the continuation of challenging business conditions, which required us to perform an interim quantitative impairment analysis at the end of the third quarter of 2019. As a result of this interim analysis, we determined that the carrying value of the India reporting unit exceeded its fair value, resulting in an aggregate impairment loss of $12.2 million related to the goodwill of our India reporting unit and a definite-lived brand intangible asset.
Annual Impairment Assessment
We completed our required annual goodwill and indefinite-lived intangible asset impairment testing as of October 1, 2019, the first day of our fourth quarter, and concluded there were no additional impairments of goodwill within any of our reporting units. Further, there were no impairments of our other indefinite-lived intangible assets as a result of the annual review process.
Reporting Units and Goodwill
As of the date of our impairment test, the operations in each of the specific regions within our U.S., Canada, Europe and International segments are considered components based on the availability of discrete financial information and the regular review by segment management. We have concluded that the components within the U.S., Canada and Europe segments each meet the criteria of having similar economic characteristics and therefore have aggregated these components into the U.S., Canada and Europe reporting units, respectively. Additionally, we determined that the components within our International segment do not meet the criteria for aggregation, and therefore, the operations of our India business constitute a separate reporting unit at the component level. As the changes in management structure resulting from the revitalization plan were not
effective until January 1, 2020, potential changes to our reporting units, if any, have not yet been evaluated and concluded. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for further discussion of our determination of reporting units for purposes of goodwill impairment testing.
The fair value of the U.S., Europe and Canada reporting units were estimated at approximately 17%, 12% and 0% in excess of carrying value, respectively, as of the October 1, 2019 testing date. In the current year testing, it was determined that the fair value of the U.S. and Canada reporting units declined during the year, while there was a slight increase in the fair value of the Europe reporting unit versus the prior year. As a result of our testing, the Europe and Canada reporting units continue to be considered at risk of impairment. The decline in fair value of the U.S. and Canada reporting units in the current year is largely due to weakening of the overall North American beer market in 2019, which adversely impacted the results of our impairment testing. These challenges were partially offset by the benefits to our discount rate as a result of the recent interest rate environment. Specifically, the discount rate used in developing our annual fair value estimates for the U.S., Europe and Canada reporting units in the current year was 8.50% for all reporting units, based on market-specific factors, as compared to 9.00%, 9.50% and 9.25%, respectively used as of the October 1, 2018 annual testing date. In the U.S. reporting unit, industry driven declines negatively impacted brand volumes as compared to 2018; however these headwinds were partially offset by continued investment behind above premium brands and innovation benefiting management's forward-looking plans. In the Europe reporting unit, while weather and tourism-related headwinds had an adverse impact on current year brand volumes, forward-looking plans continue to focus on management's premiumization agenda, which is positively impacting the forecasted future cash flows of the reporting unit. Following the interim goodwill impairment charge recorded during the third quarter of 2019 within the Canada reporting unit, the fair value of the Canada reporting unit was reduced to its carrying value. No further deterioration in value was identified in the fourth quarter testing, and therefore, the fair value of the Canada reporting unit goodwill equals its carrying value as of the October 1, 2019 testing date. As a result of the interim goodwill impairment charge within the India reporting unit, the goodwill balance was reduced to zero and is no longer subject to evaluation for impairment on a go-forward basis.
Although the fair value of each of our reporting units was determined to be either equal to or in excess of its respective carrying value as of the October 1, 2019, testing date, the fair value determinations are sensitive to further unfavorable changes in forecasted cash flows, macroeconomic conditions, market multiples or discount rates that could negatively impact future analyses. The key assumptions used to derive the estimated fair values of our reporting units represent Level 3 measurements.
Indefinite-Lived Intangible Assets
The Coors and Miller indefinite-lived brands in the U.S. continue to be sufficiently in excess of their respective carrying values as of the annual testing date.
The fair value of the indefinite-lived Coors Light brand distribution rights in Canada is considered to be at risk of future impairment with a fair value estimated at approximately 11% in excess of its carrying value as of the annual testing date. The fair value decline of the Coors Light brand distribution rights versus the prior year was a result of continued volume declines through 2019. The performance deterioration in the current year follows the goodwill impairment charge that was taken in the third quarter of 2019 that resulted from prolonged Canada beer industry declines.
The fair values of our indefinite-lived intangible assets in Europe, including the Staropramen and Carling brands, continue to be sufficiently in excess of their respective carrying values as of the annual testing date.
We utilized Level 3 fair value measurements in our impairment analysis of certain indefinite-lived intangible brand assets, including the Coors and Miller brands in the U.S., the Staropramen brand in Europe and the Coors Light brand distribution rights in Canada, which utilizes an excess earnings approach to determine the fair values of these assets as of the testing date. The future cash flows used in the analysis are based on internal cash flow projections based on our long range plans and include significant assumptions by management as noted below. Separately, we performed qualitative assessments of certain indefinite-lived intangible assets, including the Carling brand in Europe and water rights in the U.S., to determine whether it was more likely than not that the fair values of these assets were greater than their respective carrying amounts. Based on the qualitative assessments, we determined that a full quantitative analysis was not necessary.
Key Assumptions
As of the date of our annual impairment test, performed as of October 1, the Europe and Canada reporting unit goodwill balances are at risk of future impairment in the event of significant unfavorable changes in the forecasted cash flows (including prolonged weakening of economic conditions, or significant unfavorable changes in tax, environmental or other regulations, including interpretations thereof), terminal growth rates, market multiples and/or weighted-average cost of capital utilized in the discounted cash flow analyses. For testing purposes of our reporting units, management's best estimates of the expected future results are the primary driver in determining the fair value. Current projections used for our Canada reporting unit testing reflect
continued challenges within the beer industry in Canada adversely impacting the projected cash flows of the business. Current projections used for our Europe reporting unit incorporate volume and revenue growth driven by management's premiumization agenda, slightly off-set by adverse impacts to cash flows in 2019 generated by underperformance of brand volumes driven by external factors such as weather and tourism-related activity. Challenges in both Canada and Europe were partially offset by the benefits to our discount rate as a result of the recent interest rate environment.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment tests will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units and indefinite-lived intangible assets may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume and increase in costs that could significantly impact our immediate and long-range results, a decrease in sales volume driven by a prolonged weakness in consumer demand or other competitive pressures adversely affecting our long-term volume trends, a continuation of the trend away from core brands in certain of our markets, especially in markets where our core brands represent a significant portion of the market, unfavorable working capital changes and an inability to successfully achieve our cost savings targets, (ii) adverse changes in macroeconomic conditions or an economic recovery that significantly differs from our assumptions in timing and/or degree (such as a recession), (iii) volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average cost of capital, (iv) sensitivity to market multiples; and (v) regulation limiting or banning the manufacturing, distribution or sale of alcoholic beverages.
Based on known facts and circumstances, we evaluate and consider recent events and uncertain items, as well as related potential implications, as part of our annual assessment and incorporate into the analyses as appropriate. These facts and circumstances are subject to change and may impact future analyses. For example, we continue to monitor the challenges within the beer industry for further weakening or additional systemic structural declines. Separately, the Ontario provincial government adopted a bill that, if enacted, could adversely impact the existing terms of the beer distribution and retail systems in the province, as further described in Note 18, "Commitments and Contingencies".
While historical performance and current expectations have resulted in fair values of our reporting units and indefinite-lived intangible assets equal to or in excess of carrying values, if our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future.
Definite-Lived Intangible Assets
Regarding definite-lived intangible assets, we continuously monitor the performance of the underlying assets for potential triggering events suggesting an impairment review should be performed. With the exception of the impairment losses related to the Grolsch brand and distribution agreement definite-lived intangible assets discussed in Note 4, "Investments" and the brand intangible asset related to our India business discussed above, no such triggering events were identified in 2019, 2018 or 2017.
11. Debt
Debt Obligations
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Senior notes: | |||||||
| CAD 500 million 2.75% notes due September 2020(1) | $ | 384.9 | $ | 366.6 | |||
| CAD 500 million 2.84% notes due July 2023(2) | 384.9 | 366.6 | |||||
| CAD 500 million 3.44% notes due July 2026(1)(2) | 384.9 | 366.6 | |||||
| $500 million 1.45% notes due July 2019(2) | — | 500.0 | |||||
| $500 million 1.9% notes due March 2019(3) | — | 499.8 | |||||
| $500 million 2.25% notes due March 2020(3) | 499.8 | 499.0 | |||||
| $1.0 billion 2.1% notes due July 2021(2) | 1,000.0 | 1,000.0 | |||||
| $500 million 3.5% notes due May 2022(4) | 506.5 | 509.3 | |||||
| $2.0 billion 3.0% notes due July 2026(2) | 2,000.0 | 2,000.0 | |||||
| $1.1 billion 5.0% notes due May 2042(4) | 1,100.0 | 1,100.0 | |||||
| $1.8 billion 4.2% notes due July 2046(2) | 1,800.0 | 1,800.0 | |||||
| EUR 500 million notes due March 2019(3) | — | 573.4 | |||||
| EUR 800 million 1.25% notes due July 2024(2) | 897.0 | 917.4 | |||||
| Finance leases and other(5) | 129.5 | 43.0 | |||||
| Less: unamortized debt discounts and debt issuance costs | (56.7 | ) | (64.8 | ) | |||
| Total long-term debt (including current portion) | 9,030.8 | 10,476.9 | |||||
| Less: current portion of long-term debt | (921.3 | ) | (1,583.1 | ) | |||
| Total long-term debt | $ | 8,109.5 | $ | 8,893.8 | |||
| Short-term borrowings: | |||||||
| Other short-term borrowings(6) | $ | 6.9 | $ | 11.4 | |||
| Current portion of long-term debt | 921.3 | 1,583.1 | |||||
| Current portion of long-term debt and short-term borrowings | $ | 928.2 | $ | 1,594.5 |
| (1) | Prior to Molson Coors International, L.P., a Delaware limited partnership and wholly-owned subsidiary of MCBC ("Molson Coors International L.P."), issuing our CAD 500 million 2.75% notes due September 18, 2020 (the "2015 Notes"), on September 18, 2015, we entered into forward starting interest rate swap agreements to hedge the interest rate volatility for a 10 year period. We settled these swaps at the time of issuance of the 2015 Notes and are amortizing a portion of the resulting loss from AOCI to interest expense over the remaining term of the 2015 Notes as well as over a portion of the 2016 Notes defined below up to the full 10-year term of the interest rate swap agreements. The amortizing loss will increase our effective cost of borrowing compared to the stated coupon rates by 0.65% and 0.60% on each of the CAD 500 million notes due in 2020 and 2026, respectively. See Note 16, "Derivative Instruments and Hedging Activities" for further details on the forward starting interest rate swaps. |
| (2) | On July 7, 2016, MCBC issued approximately $5.3 billion senior notes with portions maturing from July 15, 2019 through July 15, 2046 ("2016 USD Notes"), and EUR 800.0 million senior notes maturing July 15, 2024 ("2016 EUR Notes"), and Molson Coors International L.P., completed a private placement of CAD 1.0 billion senior notes maturing July 15, 2023, and July 15, 2026 ("2016 CAD Notes"), in order to partially fund the financing of the Acquisition (2016 USD Notes, 2016 EUR Notes and 2016 CAD Notes, collectively, the "2016 Notes"). These issuances resulted in total proceeds of approximately $6.9 billion, net of underwriting fees and discounts of $36.5 million and $17.7 million, respectively. Total debt issuance costs capitalized in connection with these notes including underwriting fees, discounts and other financing related costs, were approximately $65 million and are being amortized over the respective terms of the 2016 Notes. The 2016 Notes began accruing interest upon issuance, with semi-annual payments due on the 2016 USD Notes and 2016 CAD Notes in January and July beginning in 2017, and annual interest payments due on the |
2016 EUR Notes in July beginning in 2017. During the third quarter of 2019, we repaid the $500 million 1.45% notes which matured in July 2019.
As of December 31, 2019, we have cross currency swaps in order to hedge a portion of the foreign currency translational impacts of our European investment. As a result of the swaps, we have economically converted a portion of our $1.0 billion 2.1% senior notes due 2021 and associated interest to EUR denominated, which will result in a EUR interest rate to be received of 0.71%. See Note 16, "Derivative Instruments and Hedging Activities" for further details.
| (3) | On March 15, 2017, MCBC issued approximately $1.5 billion of senior notes, consisting of $500 million 1.9% senior notes due March 15, 2019, and $500 million 2.25% senior notes due March 15, 2020 (collectively, the "2017 USD Notes") and EUR 500 million floating rate senior notes due March 15, 2019 ("2017 EUR Notes") (2017 USD Notes and 2017 EUR Notes, collectively, the "2017 Notes"). We bear quarterly interest on the 2017 EUR Notes at the rate of 0.35% plus three-month EURIBOR. These issuances resulted in total proceeds of approximately $1.5 billion, net of underwriting fees and discounts of $3.1 million and $0.7 million, respectively. Total debt issuance costs capitalized in connection with these notes, including underwriting fees, discounts and other financing related costs, were $6.1 million and are being amortized over the respective terms of the 2017 Notes. The 2017 Notes began accruing interest upon issuance, with quarterly payments due on the 2017 EUR Notes beginning June 15, 2017, and semi-annual payments due on the 2017 USD Notes beginning September 15, 2017. During the first quarter of 2019, we repaid the $500 million 1.9% senior notes and EUR 500 million floating rate senior notes. |
In the first quarter of 2017, we entered into interest rate swaps to economically convert our fixed rate 2017 USD Notes to floating rate debt. As a result of these hedge programs, the carrying value of the $500 million 1.9% notes and $500 million 2.25% notes were adjusted for fair value movements attributable to the benchmark interest rate. During the fourth quarter of 2017, we settled these interest rate swaps, at which time we ceased adjusting the carrying value of the 2017 USD Notes for the fair value of these swaps. At the time of termination, cumulative adjustments to the carrying value of the notes were losses of $1.6 million on the $500 million 1.9% notes and $1.9 million on the $500 million 2.25% notes. Beginning in the fourth quarter of 2017, we began amortizing these cumulative adjustments to interest expense over the remaining term of each respective note and will accordingly increase the annual effective interest rate for the $500 million 1.9% notes and $500 million 2.25% notes for the remaining term of the notes by 0.24% and 0.17%, respectively. The fair value adjustments and subsequent amortization have been excluded from the aggregate principal debt maturities table presented below.
As of December 31, 2019, we have cross currency swaps in order to hedge a portion of the foreign currency translational impacts of our European investment. As a result of the swaps, we have economically converted our $500 million 2.25% notes due 2020 and associated interest to EUR denominated, which result in a EUR interest rate to be received of 0.68%. See Note 16, "Derivative Instruments and Hedging Activities" for further details.
Prior to issuing the 2017 EUR Notes, we entered into foreign currency forward agreements to economically hedge the foreign currency exposure of a portion of the respective notes, which were subsequently settled on March 15, 2017, concurrent with the issuance of the 2017 EUR Notes. Additionally, upon issuance we designated the 2017 EUR Notes as a net investment hedge of our Europe business. See Note 16, "Derivative Instruments and Hedging Activities" for further details.
| (4) | On May 3, 2012, we issued approximately $1.9 billion of senior notes with portions maturing in 2017, 2022 and 2042. The issuance resulted in total proceeds, before expenses, of approximately $1.9 billion, net of underwriting fees and discounts of $14.7 million and $4.6 million, respectively. Total debt issuance costs capitalized in connection with these senior notes, including the underwriting fees and discounts, were approximately $18.0 million and are being amortized over the term of the notes. |
During 2014, we entered into interest rate swaps to economically convert our fixed rate $500 million 3.5% notes due 2022 ("$500 million notes") to floating rate debt. As a result of fair value hedge accounting, the carrying value of the $500 million notes included a cumulative adjustment for the change in fair value of $18.1 million at the time of termination of the swaps. Beginning in the fourth quarter of 2015, we began amortizing this cumulative adjustment to interest expense over the remaining term of the $500 million notes and will accordingly decrease the annual effective interest rate for the remaining term by 0.56%. The fair value adjustments and subsequent amortization have been excluded from the aggregate principal debt maturities table presented below.
| (5) | As of January 1, 2019, we reclassified approximately $3 million and $82 million of short-term and long-term finance lease liabilities from accounts payable and other current liabilities and other non-current liabilities to current portion of long-term debt and short-term borrowings and long-term debt, respectively, in connection with our adoption of the new lease accounting standard. See Note 2, "New Accounting Pronouncements" for further details. |
| (6) | As of December 31, 2019, we had $1.1 million in bank overdrafts and $55.0 million in bank cash related to our cross-border, cross-currency cash pool for a net positive position of $53.9 million. As of December 31, 2018, we had $1.1 million in bank overdrafts and $88.9 million in bank cash related to our cross-border, cross-currency cash pool for a net positive position of $87.8 million. |
We had total outstanding borrowings of $2.8 million and $7.3 million under our JPY facilities as of December 31, 2019 and December 31, 2018, respectively. In addition, we have USD, GBP and CAD overdraft facilities under which we had no outstanding borrowings as of December 31, 2019 or December 31, 2018. A summary of our short-term facility availability is presented below. See Note 18, "Commitments and Contingencies" for further discussion related to letters of credit.
-
JPY 1.3 billion line of credit at Japan TIBOR plus 0.30%
-
JPY 100 million overdraft facility at Japan short-term Prime rate
-
CAD unlimited overdraft facility at CAD Prime +3.95%
-
GBP 20 million overdraft facility at GBP base rate plus 1.5%
| • | USD 5 million overdraft facility at USD Prime plus 5% |
Debt Fair Value Measurements
We utilize market approaches to estimate the fair value of certain outstanding 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 December 31, 2019 and December 31, 2018, the fair value of our outstanding long-term debt (including current portion of long-term debt) was approximately $9.2 billion and $9.9 billion, respectively. All senior notes are valued based on significant observable inputs and classified as Level 2 in the fair value hierarchy. The carrying values of all other outstanding long-term borrowings and our short-term borrowings approximate their fair values and are also classified as Level 2 in the fair value hierarchy.
Revolving Credit Facility
We maintain a $1.5 billion revolving credit facility, that also allows us to issue a maximum aggregate amount of commercial paper of $1.5 billion at any time. We use this financing from time to time to leverage cash needs including debt repayments. As of December 31, 2019 and December 31, 2018, we had $1.5 billion available to draw under our $1.5 billion revolving credit facility, which we extended the maturity date in the current year to July 7, 2024, as there were no outstanding revolving credit facility or commercial paper borrowings.
The maximum leverage ratio of this facility as of December 31, 2019 is 4.25x net debt to EBITDA, with a decline to 4.00x net debt to EBITDA as of the last day of the fiscal quarter ending December 31, 2020.
Under the terms of each of our debt facilities, we must comply with certain restrictions. These include customary events of default and specified representations, warranties and covenants, as well as covenants that restrict our ability to incur certain additional priority indebtedness (certain thresholds of secured consolidated net tangible assets), certain leverage threshold percentages, create or permit liens on assets, and restrictions on mergers, acquisitions, and certain types of sale lease-back transactions. As of December 31, 2019 and December 31, 2018, we were in compliance with all of these restrictions and have met all debt payment obligations. All of our outstanding senior notes as of December 31, 2019 rank pari-passu.
As of December 31, 2019, the aggregate principal debt maturities of long-term debt and short-term borrowings, based on foreign exchange rates as of December 31, 2019, for the next 5 years are as follows:
| Year | Amount | |||
| (In millions) | ||||
| 2020 | $ | 897.2 | ||
| 2021 | 1,005.2 | |||
| 2022 | 505.0 | |||
| 2023 | 389.7 | |||
| 2024 | 901.6 | |||
| Thereafter | 5,294.9 | |||
| Total | $ | 8,993.6 |
The aggregate principal debt maturities in the table above excludes finance leases which are disclosed in Note 19, "Leases."
Interest
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Interest incurred | $ | 289.2 | $ | 311.7 | $ | 351.8 | |||||
| Interest capitalized | (8.3 | ) | (5.5 | ) | (2.5 | ) | |||||
| Interest expensed | $ | 280.9 | $ | 306.2 | $ | 349.3 |
12. Inventories
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Finished goods | $ | 236.7 | $ | 229.8 | |||
| Work in process | 84.0 | 83.4 | |||||
| Raw materials | 227.1 | 224.3 | |||||
| Packaging materials | 68.1 | 54.3 | |||||
| Inventories, net | $ | 615.9 | $ | 591.8 |
13. Share-Based Payments
We have one share-based compensation plan, the MCBC Incentive Compensation Plan (the "Incentive Compensation Plan"), as of December 31, 2019 and all outstanding awards fall under this plan.
MCBC Incentive Compensation Plan
We issue the following types of awards related to shares of Class B common stock to certain directors, officers, and other eligible employees, pursuant to the Incentive Compensation Plan: RSUs, DSUs, PSUs, and stock options.
RSU awards are issued based upon the market value equal to the price of our stock at the date of the grant and vest over a period of three years. In 2019, 2018 and 2017, we granted 0.5 million, 0.4 million and 0.3 million RSUs, respectively, with a weighted-average market value of $55.03, $72.78 and $92.02 each, respectively. Prior to vesting, RSUs have no voting rights.
DSU awards, under the Directors' Stock Plan pursuant to the Incentive Compensation Plan, are elections made by non-employee directors of MCBC that enable them to receive all or one-half of their annual cash retainer payments in our stock. The deferred stock unit awards are issued at the market value equal to the closing price on the date of the grant. The DSUs are paid in shares of stock upon termination of service. Prior to vesting, DSUs have no voting rights. In 2019, 2018 and 2017, we granted a small number of DSUs with a weighted-average market value of $56.68, $64.48 and $86.06 per share, respectively.
As part of our annual grant in the first quarter of 2019, 2018 and 2017, we granted PSUs. PSUs are granted with a target value established at the date of grant and vest upon completion of a service requirement. The settlement amount of the PSUs is determined based on market and performance metrics, which include our total shareholder return performance relative to the stock market index defined by each award and specified internal performance metrics designed to drive greater shareholder return. PSU compensation expense is based on a fair value assigned to the market metric upon grant using a Monte Carlo model, which remains constant throughout the vesting period of three years and a performance multiplier, which will vary due to changing estimates of the performance metric condition. During 2019, 2018 and 2017, we granted 0.3 million, 0.2 million and 0.2 million PSUs, respectively, each with a weighted-average fair value of $53.31, $78.30 and $97.13, respectively.
Stock options are granted with an exercise price equal to the market value of a share of Class B common stock on the date of grant. Stock options have a term of ten years and generally vest over three years. During 2019, 2018 and 2017, we granted 0.4 million, 0.2 million and 0.2 million options, respectively, each with a weighted-average fair value of $9.20, $15.44 and $18.66, respectively.
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| (In millions) | |||||||||||
| Pretax share-based compensation expense(1) | $ | 8.5 | $ | 42.6 | $ | 58.3 | |||||
| Tax benefit | (1.6 | ) | (6.9 | ) | (11.1 | ) | |||||
| After-tax share-based compensation expense | $ | 6.9 | $ | 35.7 | $ | 47.2 |
| (1) | The decrease in share-based compensation expense in 2019 was primarily driven by the reversal of cumulative compensation expense previously recognized for our 2018 and 2017 PSU awards as the achievement of the performance conditions are no longer deemed probable for the respective performance periods, as well as the impacts of the reversal of expense associated with forfeitures related to the revitalization plan initiated in 2019. Additionally, our share-based compensation expense in 2018 and 2017 also includes expense associated with replacement awards issued in connection with the Acquisition. |
As of December 31, 2019, there was $27.5 million of total unrecognized compensation cost from all share-based compensation arrangements granted under the Incentive Compensation Plan, related to unvested awards. This total compensation expense is expected to be recognized over a weighted-average period of 1.9 years.
| RSUs and DSUs | PSUs | ||||||
| Units | Weighted-average grant date fair value per unit | Units | Weighted-average grant date fair value per unit | ||||
| (In millions, except per unit amounts) | |||||||
| Non-vested as of December 31, 2018 | 1.0 | $88.53 | 0.5 | $86.85 | |||
| Granted | 0.5 | $55.05 | 0.3 | $53.31 | |||
| Vested | (0.4) | $98.91 | (0.1) | $88.01 | |||
| Forfeited | (0.1) | $71.54 | (0.1) | $72.53 | |||
| Non-vested as of December 31, 2019 | 1.0 | $68.18 | 0.6 | $70.37 |
The weighted-average fair value per unit for the non-vested PSUs is $21.63 as of December 31, 2019.
The total intrinsic values of RSUs and DSUs vested during 2019, 2018 and 2017 were $23.6 million, $24.8 million and $31.5 million, respectively.
| Stock options | |||||||||
| Awards | Weighted- average exercise price | Weighted- average remaining contractual life (years) | Aggregate intrinsic value | ||||||
| (In millions, except per share amounts and years) | |||||||||
| Outstanding as of December 31, 2018 | 1.3 | $70.56 | 5.2 | $ | 4.3 | ||||
| Granted | 0.4 | $60.87 | |||||||
| Exercised | (0.1) | $43.86 | |||||||
| Forfeited | — | — | |||||||
| Outstanding as of December 31, 2019 | 1.6 | $68.77 | 3.8 | $ | 3.1 | ||||
| Expected to vest as of December 31, 2019 | 0.3 | $67.27 | 8.8 | $ | — | ||||
| Exercisable as of December 31, 2019 | 1.3 | $69.09 | 2.8 | $ | 3.1 |
The total intrinsic values of exercises during 2019, 2018 and 2017 were $0.6 million, $9.6 million and $7.0 million, respectively. Total tax benefits realized, including excess tax benefits, from share-based awards vested or exercised was $4.5 million, $8.4 million and $20.2 million, respectively.
The shares of Class B common stock to be issued under the stock option plans are made available from authorized and unissued MCBC Class B common stock. As of December 31, 2019, there were 3.0 million shares of MCBC Class B common stock available for the issuance under the Incentive Compensation Plan.
The fair value of each option granted in 2019, 2018 and 2017 was determined on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| For the years ended | |||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||
| Risk-free interest rate | 2.46% | 2.65% | 2.04% | ||
| Dividend yield | 4.16% | 2.08% | 1.64% | ||
| Volatility range | 24.46% - 24.60% | 22.36% - 24.14% | 22.40% - 22.88% | ||
| Weighted-average volatility | 24.48% | 22.81% | 22.52% | ||
| Expected term (years) | 5.3 | 5.3 | 5.1 | ||
| Weighted-average fair value | $9.20 | $15.44 | $18.66 |
The risk-free interest rates utilized for periods throughout the contractual life of the stock options are based on a zero-coupon U.S. Department of Treasury security yield at the time of grant. Expected volatility is based on a combination of historical and implied volatility of our stock. The expected term of stock options is estimated based upon observations of historical employee option exercise patterns and trends of those employees granted options in the respective year.
The fair value of the market metric for each PSU granted in 2019, 2018 and 2017 was determined on the date of grant using a Monte Carlo model to simulate total stockholder return for MCBC and peer companies with the following weighted-average assumptions:
| For the years ended | |||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||
| Risk-free interest rate | 2.49% | 2.34% | 1.59% | ||
| Dividend yield | 4.17% | 2.08% | 1.64% | ||
| Volatility range | 13.82% - 42.46% | 13.03% - 81.87% | 13.71% - 80.59% | ||
| Weighted-average volatility | 24.97% | 22.76% | 24.24% | ||
| Expected term (years) | 2.8 | 2.8 | 2.8 | ||
| Weighted-average fair market value | $53.31 | $78.30 | $97.13 |
The risk-free interest rates utilized for periods throughout the expected term of the PSUs are based on a zero-coupon U.S. Department of Treasury security yield at the time of grant. Expected volatility is based on historical volatility of our stock as well as the stock of our peer firms, as shown within the volatility range above, for a period from the grant date consistent with the expected term. The expected term of PSUs is calculated based on the grant date to the end of the performance period.
14. Accumulated Other Comprehensive Income (Loss)
| MCBC stockholders' equity | |||||||||||||||||||
| Foreign currency translation adjustments | Gain (loss) on derivative instruments | Pension and Postretirement Benefit adjustments | Equity Method Investments | Accumulated other comprehensive income (loss) | |||||||||||||||
| (In millions) | |||||||||||||||||||
| As of December 31, 2016 (1) | $ | (972.0 | ) | $ | 2.6 | $ | (532.5 | ) | $ | (69.9 | ) | $ | (1,571.8 | ) | |||||
| Foreign currency translation adjustments | 638.3 | — | 4.7 | — | 643.0 | ||||||||||||||
| Gain (loss) on net investment hedges | (182.6 | ) | — | — | — | (182.6 | ) | ||||||||||||
| Unrealized gain (loss) on derivative instruments | — | (22.7 | ) | — | — | (22.7 | ) | ||||||||||||
| Reclassification of derivative (gain) loss to income | — | 2.0 | — | — | 2.0 | ||||||||||||||
| Pension and other postretirement benefit adjustments | — | — | 181.8 | — | 181.8 | ||||||||||||||
| Amortization of net prior service (benefit) cost and net actuarial (gain) loss to income and settlement | — | — | 4.4 | — | 4.4 | ||||||||||||||
| Ownership share of unconsolidated subsidiaries' other comprehensive income (loss) | — | — | — | 14.3 | 14.3 | ||||||||||||||
| Tax benefit (expense) | 107.8 | 4.6 | (36.9 | ) | (3.9 | ) | 71.6 | ||||||||||||
| As of December 31, 2017 | $ | (408.5 | ) | $ | (13.5 | ) | $ | (378.5 | ) | $ | (59.5 | ) | $ | (860.0 | ) | ||||
| Foreign currency translation adjustments | (411.6 | ) | — | (0.6 | ) | — | (412.2 | ) | |||||||||||
| Reclassification of cumulative translation adjustment to income (2) | 6.0 | — | — | — | 6.0 | ||||||||||||||
| Gain (loss) on net investment hedges | 106.4 | — | — | — | 106.4 | ||||||||||||||
| Unrealized gain (loss) on derivative instruments | — | 14.5 | — | — | 14.5 | ||||||||||||||
| Reclassification of derivative (gain) loss to income | — | 3.4 | — | — | 3.4 | ||||||||||||||
| Pension and other postretirement benefit adjustments | — | — | 55.4 | — | 55.4 | ||||||||||||||
| Amortization of net prior service (benefit) cost and net actuarial (gain) loss to income and settlement | — | — | 6.5 | — | 6.5 | ||||||||||||||
| Ownership share of unconsolidated subsidiaries' other comprehensive income (loss) | — | — | — | (1.0 | ) | (1.0 | ) | ||||||||||||
| Tax benefit (expense) | (51.0 | ) | (4.7 | ) | (13.5 | ) | 0.2 | (69.0 | ) | ||||||||||
| As of December 31, 2018 | $ | (758.7 | ) | $ | (0.3 | ) | $ | (330.7 | ) | $ | (60.3 | ) | $ | (1,150.0 | ) | ||||
| Foreign currency translation adjustments | 129.3 | — | (2.5 | ) | — | 126.8 | |||||||||||||
| Gain (loss) on net investment hedges | 50.3 | — | — | — | 50.3 | ||||||||||||||
| Unrealized gain (loss) on derivative instruments | — | (111.3 | ) | — | — | (111.3 | ) | ||||||||||||
| Reclassification of derivative (gain) loss to income | — | 0.6 | — | — | 0.6 | ||||||||||||||
| Pension and other postretirement benefit adjustments | — | — | (43.7 | ) | — | (43.7 | ) | ||||||||||||
| Amortization of net prior service (benefit) cost and net actuarial (gain) loss to income and settlement | — | — | 26.5 | — | 26.5 | ||||||||||||||
| Ownership share of unconsolidated subsidiaries' other comprehensive income (loss) | — | — | — | (14.4 | ) | (14.4 | ) | ||||||||||||
| Tax benefit (expense) | (0.1 | ) | 27.0 | (2.9 | ) | 3.8 | 27.8 | ||||||||||||
| Net current-period other comprehensive income (loss) | 179.5 | (83.7 | ) | (22.6 | ) | (10.6 | ) | 62.6 | |||||||||||
| Reclassification of stranded tax effects (see Note 2) | (73.3 | ) | (3.8 | ) | 2.3 | — | (74.8 | ) | |||||||||||
| As of December 31, 2019 | $ | (652.5 | ) | $ | (87.8 | ) | $ | (351.0 | ) | $ | (70.9 | ) | $ | (1,162.2 | ) |
| (1) | Amounts have been adjusted to reflect the retrospective application of a change in presentation. Specifically, the unrealized gain (loss) on outstanding net investment hedge positions was historically presented within the "gain (loss) on derivative instruments" column of this table. Once settled, the realized gain (loss) was reclassified to be presented within the "foreign currency translation adjustments" column. We have retrospectively adjusted this table to present all activity associated with net investment hedge positions within the "foreign currency translation adjustments" column, along with other insignificant presentational reclassifications. These presentational changes had no net impact on our aggregate AOCI balances or our total comprehensive income (loss) amounts on our consolidated statements of comprehensive income (loss) for any period presented. However, we have retrospectively reflected a presentational reclassification of $116.0 million between the foreign currency translation adjustments and unrealized gain (loss) on derivative instruments lines on the consolidated statement of comprehensive income (loss) for the year ended December 31, 2017. |
| (2) | As a result of exiting our China business, the associated cumulative foreign currency translation adjustment was reclassified from AOCI and recognized within special items, net upon substantial liquidation. See Note 7, "Special Items" for further details. |
We have significant levels of net assets denominated in currencies other than the USD due to our operations in foreign countries, and therefore we recognize OCI gains and/or losses when those items are translated to USD. The foreign currency translation gains recognized during 2019 were due to the strengthening of the CAD and GBP versus the USD. The foreign currency translation losses recognized during 2018 were due to the weakening of the CAD, GBP and other currencies of our Europe operations versus the USD. The foreign currency translation gains recognized during 2017 were due to the strengthening of the CAD, GBP, and other currencies of our Europe operations versus the USD.
Reclassifications from AOCI to income:
| For the years ended | |||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||||
| Reclassifications from AOCI | Location of gain (loss) recognized in income | ||||||||||||
| (In millions) | |||||||||||||
| Gain/(loss) on cash flow hedges: | |||||||||||||
| Forward starting interest rate swaps | $ | (3.0 | ) | $ | (3.0 | ) | $ | (3.7 | ) | Interest expense, net | |||
| Foreign currency forwards | 3.1 | (0.2 | ) | 3.7 | Cost of goods sold | ||||||||
| Foreign currency forwards | (0.7 | ) | (0.2 | ) | (2.0 | ) | Other income (expense), net | ||||||
| Total income (loss) reclassified, before tax | (0.6 | ) | (3.4 | ) | (2.0 | ) | |||||||
| Income tax benefit (expense) | 0.1 | 0.9 | 0.7 | ||||||||||
| Net income (loss) reclassified, net of tax | $ | (0.5 | ) | $ | (2.5 | ) | $ | (1.3 | ) | ||||
| Amortization of defined benefit pension and other postretirement benefit plan items: | |||||||||||||
| Prior service benefit (cost) | $ | (0.4 | ) | $ | (0.5 | ) | $ | (0.5 | ) | Other pension and postretirement benefits (costs), net | |||
| Net actuarial gain (loss) and settlement | (26.1 | ) | (6.0 | ) | (3.9 | ) | Other pension and postretirement benefits (costs), net | ||||||
| Total income (loss) reclassified, before tax | (26.5 | ) | (6.5 | ) | (4.4 | ) | |||||||
| Income tax benefit (expense) | 6.8 | 1.6 | 0.8 | ||||||||||
| Net income (loss) reclassified, net of tax | $ | (19.7 | ) | $ | (4.9 | ) | $ | (3.6 | ) | ||||
| Other reclassifications from AOCI to Income: | |||||||||||||
| China cumulative translation adjustment resulting from substantial liquidation | $ | — | $ | (6.0 | ) | $ | — | Special items, net | |||||
| Income tax benefit (expense) | — | — | — | ||||||||||
| Net income (loss) reclassified, net of tax | $ | — | $ | (6.0 | ) | $ | — | ||||||
| Total income (loss) reclassified, net of tax | $ | (20.2 | ) | $ | (13.4 | ) | $ | (4.9 | ) |
15. Employee Retirement Plans and Postretirement Benefits
We maintain retirement plans for the majority of our employees. Depending on the location and benefit program, we provide either defined benefit pension or defined contribution pension plans to our employees. Each plan is managed locally and in accordance with respective local laws and regulations. We have defined benefit pension plans in the U.S., U.K., Canada and Japan. All active retirement plans for Corporate employees are defined contribution plans. Additionally, we offer OPEB plans to a portion of our Canadian, U.S., Corporate and Central European employees; these plans are not funded. BRI and BDL maintain defined benefit, defined contribution and postretirement benefit plans as well; however, those plans are excluded from this disclosure as BRI and BDL are equity method investments and not consolidated.
The U.S. participates in and makes contributions to multi-employer pension plans. Contributions to multi-employer pension plans were $7.9 million for both 2019 and 2018, and $7.7 million in 2017. Additionally, the U.S. postretirement health plan qualifies for the federal subsidy under the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”) because the prescription drug benefits provided under the Company's postretirement health plan for Medicare eligible retirees generally require lower premiums from covered retirees and have lower co-payments and deductibles than the benefits provided in Medicare Part D and, accordingly, are actuarially equivalent to or better than the benefits provided under the Act. The benefits paid, including prescription drugs, were $37.6 million, $37.1 million and $36.6 million in 2019, 2018 and 2017, respectively. Subsidies of $0.1 million for 2019, and $0.3 million for both 2018 and 2017, were received.
Defined Benefit and OPEB Plans
Net Periodic Pension and OPEB Cost (Benefit)
| For the years ended | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||||
| Pension | OPEB | Consolidated | Pension | OPEB | Consolidated | Pension | OPEB | Consolidated | |||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Service cost: | |||||||||||||||||||||||||||||||||||
| Service cost | $ | 4.0 | $ | 7.0 | $ | 11.0 | $ | 5.5 | $ | 9.3 | $ | 14.8 | $ | 7.7 | $ | 10.9 | $ | 18.6 | |||||||||||||||||
| Other pension and postretirement costs (benefits), net: | |||||||||||||||||||||||||||||||||||
| Interest cost | 161.9 | 25.5 | 187.4 | 161.8 | 25.8 | 187.6 | 205.6 | 30.6 | 236.2 | ||||||||||||||||||||||||||
| Expected return on plan assets, net of expenses | (217.3 | ) | 0.5 | (216.8 | ) | (232.8 | ) | 0.5 | (232.3 | ) | (287.9 | ) | 0.4 | (287.5 | ) | ||||||||||||||||||||
| Amortization of prior service cost (benefit) | 1.1 | (0.7 | ) | 0.4 | 0.7 | (0.2 | ) | 0.5 | 0.5 | — | 0.5 | ||||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | 10.4 | (14.1 | ) | (3.7 | ) | 7.6 | (1.7 | ) | 5.9 | 12.2 | — | 12.2 | |||||||||||||||||||||||
| Curtailment, settlement or special termination benefit loss (gain)(1) | 30.5 | — | 30.5 | 0.8 | 0.1 | 0.9 | (5.4 | ) | (2.9 | ) | (8.3 | ) | |||||||||||||||||||||||
| Expected participant contributions | (0.7 | ) | — | (0.7 | ) | (0.8 | ) | — | (0.8 | ) | (0.5 | ) | — | (0.5 | ) | ||||||||||||||||||||
| Total other pension and postretirement cost (benefits), net | $ | (14.1 | ) | $ | 11.2 | $ | (2.9 | ) | $ | (62.7 | ) | $ | 24.5 | $ | (38.2 | ) | $ | (75.5 | ) | $ | 28.1 | $ | (47.4 | ) | |||||||||||
| Net periodic pension and OPEB cost (benefit) | $ | (10.1 | ) | $ | 18.2 | $ | 8.1 | $ | (57.2 | ) | $ | 33.8 | $ | (23.4 | ) | $ | (67.8 | ) | $ | 39.0 | $ | (28.8 | ) |
| (1) | During the fourth quarter of 2019, we utilized plan assets to purchase buy-out annuity contracts for a portion of our Canadian pension plans and recognized a pension settlement charge of $29.8 million. |
Obligations and Changes in Funded Status
| For the year ended December 31, 2019 | For the year ended December 31, 2018 | ||||||||||||||||||||||
| Pension | OPEB | Total | Pension | OPEB | Total | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||
| Prior year benefit obligation | $ | 4,904.7 | $ | 672.1 | $ | 5,576.8 | $ | 5,584.4 | $ | 803.6 | $ | 6,388.0 | |||||||||||
| Service cost, net of expected employee contributions | 3.3 | 7.0 | 10.3 | 4.7 | 9.3 | 14.0 | |||||||||||||||||
| Interest cost | 161.9 | 25.5 | 187.4 | 161.8 | 25.8 | 187.6 | |||||||||||||||||
| Actual employee contributions | 0.5 | — | 0.5 | 0.6 | — | 0.6 | |||||||||||||||||
| Actuarial loss (gain) | 533.4 | 7.4 | 540.8 | (342.3 | ) | (108.8 | ) | (451.1 | ) | ||||||||||||||
| Amendments and special termination benefits | (1.4 | ) | — | (1.4 | ) | 10.7 | (3.2 | ) | 7.5 | ||||||||||||||
| Benefits paid | (350.6 | ) | (44.1 | ) | (394.7 | ) | (296.8 | ) | (44.1 | ) | (340.9 | ) | |||||||||||
| Curtailment and settlement | (192.9 | ) | (0.2 | ) | (193.1 | ) | (0.6 | ) | — | (0.6 | ) | ||||||||||||
| Foreign currency exchange rate change | 139.7 | 4.8 | 144.5 | (217.8 | ) | (10.5 | ) | (228.3 | ) | ||||||||||||||
| Benefit obligation at end of year | $ | 5,198.6 | $ | 672.5 | $ | 5,871.1 | $ | 4,904.7 | $ | 672.1 | $ | 5,576.8 | |||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Prior year fair value of assets | $ | 5,217.3 | $ | — | $ | 5,217.3 | $ | 5,897.7 | $ | — | $ | 5,897.7 | |||||||||||
| Actual return on plan assets | 712.2 | — | 712.2 | (156.1 | ) | — | (156.1 | ) | |||||||||||||||
| Employer contributions | 5.1 | 44.1 | 49.2 | 8.9 | 44.1 | 53.0 | |||||||||||||||||
| Actual employee contributions | 0.5 | — | 0.5 | 0.6 | — | 0.6 | |||||||||||||||||
| Settlement | (192.9 | ) | — | (192.9 | ) | (0.6 | ) | — | (0.6 | ) | |||||||||||||
| Benefits and plan expenses paid | (350.6 | ) | (44.1 | ) | (394.7 | ) | (296.8 | ) | (44.1 | ) | (340.9 | ) | |||||||||||
| Foreign currency exchange rate change | 150.5 | — | 150.5 | (236.4 | ) | — | (236.4 | ) | |||||||||||||||
| Fair value of plan assets at end of year | $ | 5,542.1 | $ | — | $ | 5,542.1 | $ | 5,217.3 | $ | — | $ | 5,217.3 | |||||||||||
| Funded status: | $ | 343.5 | $ | (672.5 | ) | $ | (329.0 | ) | $ | 312.6 | $ | (672.1 | ) | $ | (359.5 | ) | |||||||
| Amounts recognized in the Consolidated Balance Sheets: | |||||||||||||||||||||||
| Other non-current assets | $ | 434.3 | $ | — | $ | 434.3 | $ | 416.7 | $ | — | $ | 416.7 | |||||||||||
| Accounts payable and other current liabilities | (4.1 | ) | (42.6 | ) | (46.7 | ) | (4.5 | ) | (45.1 | ) | (49.6 | ) | |||||||||||
| Pension and postretirement benefits | (86.7 | ) | (629.9 | ) | (716.6 | ) | (99.6 | ) | (627.0 | ) | (726.6 | ) | |||||||||||
| Net amounts recognized | $ | 343.5 | $ | (672.5 | ) | $ | (329.0 | ) | $ | 312.6 | $ | (672.1 | ) | $ | (359.5 | ) |
The accumulated benefit obligation for our defined benefit pension plans was approximately $5.2 billion and $4.9 billion as of December 31, 2019 and December 31, 2018, respectively. The $30.5 million decrease in the net underfunded status of our aggregate pension and OPEB plans from December 31, 2018 to December 31, 2019, was primarily driven by strong asset returns. Separately, as discussed above, in the fourth quarter of 2019 we purchased buy-out annuity contracts for a portion of our Canadian pension plans resulting in a decrease to our projected benefit obligation and a corresponding reduction to our plan assets.
As of December 31, 2019 and December 31, 2018, our defined benefit plan in the U.K. and certain defined benefit plans in the U.S. and Canada were overfunded as a result of our ongoing de-risking strategy. Information for our defined benefit plans that had aggregate accumulated benefit obligations and projected benefit obligations in excess of plan assets is as follows:
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Accumulated benefit obligation | $ | 793.6 | $ | 742.1 | |||
| Projected benefit obligation | $ | 794.0 | $ | 742.4 | |||
| Fair value of plan assets | $ | 703.2 | $ | 638.3 |
Information for OPEB plans with an accumulated postretirement benefit obligation in excess of plan assets has been disclosed above in "Obligations and Changes in Funded Status" as all of our OPEB plans are unfunded.
Accumulated Other Comprehensive Income (Loss)
Amounts recognized in AOCI not yet recognized as components of net periodic pension and OPEB cost, pretax, were as follows:
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||||||||||
| Pension | OPEB | Total | Pension | OPEB | Total | ||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Net actuarial loss (gain) | $ | 685.7 | $ | (167.5 | ) | $ | 518.2 | $ | 687.8 | $ | (191.7 | ) | $ | 496.1 | |||||||||
| Net prior service cost (benefit) | 7.1 | (4.9 | ) | 2.2 | 10.2 | (5.6 | ) | 4.6 | |||||||||||||||
| Total not yet recognized | $ | 692.8 | $ | (172.4 | ) | $ | 520.4 | $ | 698.0 | $ | (197.3 | ) | $ | 500.7 |
Changes in plan assets and benefit obligations recognized in OCI, pretax, were as follows:
| Pension | OPEB | Total | |||||||||
| (In millions) | |||||||||||
| Accumulated other comprehensive loss (income) as of December 31, 2017 | $ | 646.9 | $ | (84.9 | ) | $ | 562.0 | ||||
| Amortization of prior service (costs) benefit | (0.7 | ) | 0.2 | (0.5 | ) | ||||||
| Amortization of net actuarial (loss) gain | (7.6 | ) | 1.7 | (5.9 | ) | ||||||
| Net prior service cost | 9.8 | (4.1 | ) | 5.7 | |||||||
| Settlement | — | (0.1 | ) | (0.1 | ) | ||||||
| Current year actuarial loss (gain) | 46.8 | (107.9 | ) | (61.1 | ) | ||||||
| Foreign currency exchange rate change | 2.8 | (2.2 | ) | 0.6 | |||||||
| Accumulated other comprehensive loss (income) as of December 31, 2018 | $ | 698.0 | $ | (197.3 | ) | $ | 500.7 | ||||
| Amortization of prior service (costs) benefit | (1.1 | ) | 0.7 | (0.4 | ) | ||||||
| Amortization of net actuarial (loss) gain | (10.4 | ) | 14.1 | 3.7 | |||||||
| Net prior service cost | (2.0 | ) | — | (2.0 | ) | ||||||
| Settlement and curtailment | (29.8 | ) | (0.2 | ) | (30.0 | ) | |||||
| Current year actuarial loss (gain) | 38.5 | 7.4 | 45.9 | ||||||||
| Foreign currency exchange rate change | (0.4 | ) | 2.9 | 2.5 | |||||||
| Accumulated other comprehensive loss (income) as of December 31, 2019 | $ | 692.8 | $ | (172.4 | ) | $ | 520.4 |
Assumptions
Periodic pension and OPEB cost is actuarially calculated annually for each individual plan based on data available and assumptions made at the beginning of each year. Assumptions used in the calculation include the settlement discount rate selected and disclosed at the end of the previous year as well as other assumptions detailed in the table below. The weighted-average rates used in determining the periodic pension and OPEB cost for the fiscal years 2019, 2018 and 2017 were as follows:
| For the years ended | |||||||||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
| Pension | OPEB | Pension | OPEB | Pension | OPEB | ||||||
| Weighted-average assumptions: | |||||||||||
| Settlement discount rate | 3.44% | 3.92% | 3.01% | 3.34% | 3.36% | 3.76% | |||||
| Rate of compensation increase | 2.00% | N/A | 2.00% | N/A | 2.00% | N/A | |||||
| Expected return on plan assets(1) | 4.38% | N/A | 4.10% | N/A | 4.83% | N/A | |||||
| Health care cost trend rate | N/A | Ranging ratably from 6.5% in 2019 to 4.5% in 2037 | N/A | Ranging ratably from 6.75% in 2018 to 4.5% in 2037 | N/A | Ranging ratably from 7.0% in 2017 to 4.5% in 2037 |
| (1) | We develop our EROA assumptions annually with input from independent investment specialists including our actuaries, investment consultants, plan trustee and other specialists. Each EROA assumption is based on historical data, including historical returns, historical market rates and is calculated for each plan's individual asset class. The calculation includes inputs for interest, inflation, credit, and risk premium (active investment management) rates and fees paid to service providers. We consider our EROA to be a significant management estimate. Any material changes in the inputs to our methodology used in calculating our EROA could have a significant impact on our reported defined benefit pension plans' expense. |
Benefit obligations are actuarially calculated annually at the end of each year based on the assumptions detailed in the table below. Obligations under the OPEB plans are determined by the application of the terms of medical, dental, vision and life insurance plans, together with relevant actuarial assumptions and heath care cost trend rates. The weighted-average rates used in determining the projected benefit obligation for defined pension plans and the accumulated postretirement benefit obligation for OPEB plans, as of December 31, 2019 and December 31, 2018, were as follows:
| As of December 31, 2019 | As of December 31, 2018 | ||||||
| Pension | OPEB | Pension | OPEB | ||||
| Weighted-average assumptions: | |||||||
| Settlement discount rate | 2.55% | 2.91% | 3.44% | 3.92% | |||
| Rate of compensation increase | 2.00% | N/A | 2.00% | N/A | |||
| Health care cost trend rate | N/A | Ranging ratably from 6.25% in 2020 to 3.57% in 2040 | N/A | Ranging ratably from 6.5% in 2019 to 4.5% in 2037 |
The change to the weighted-average discount rates used for our defined benefit pension plans and postretirement plans as of December 31, 2019 from December 31, 2018, is primarily the result of declining interest rates during 2019.
Investment Strategy
The obligations of our defined benefit pension plans in the U.S., Canada and the U.K. are supported by assets held in trusts for the payment of future benefits. The business segments are obligated to adequately fund these asset trusts. The underlying investments within our defined benefit pension plans include: cash and short-term instruments, debt securities, equity securities, investment funds, and other investments including derivatives, hedge fund of funds and real estate. Investment allocations reflect the customized strategies of the respective plans.
The plans use liability driven investment strategies in managing defined pension benefits. For all defined benefit pension plan assets the plans have the following primary investment objectives:
| (1) | optimize the long-term return on plan assets at an acceptable level of risk and manage projected future cash contributions; |
| (2) | maintain a broad diversification across asset classes and among investment managers; and |
| (3) | manage the risk level of the plans' assets in relation to the plans' liabilities. |
Each plan's respective allocation targets promote optimal expected return and volatility characteristics given a focus on a long-term time horizon for fulfilling the plans' obligations. All assets are managed by external investment managers with a mandate to either match or outperform their benchmark. The plans used different asset managers in the U.S., U.K. and Canada and each plan's respective asset allocation could be impacted by a change in asset managers.
Our investment strategies for our defined benefit pension plans also consider the funding status for each plan. For defined benefit pension plans that are highly funded, assets are invested primarily in fixed income holdings that have a similar duration to the associated liabilities. For plans with lower funding levels, the fixed income component is managed in a similar manner to the highly funded plans. In addition to this liability-matching fixed income allocation, these plans also contain exposure to return generating assets including: equities, real estate, debt, and other investments held with the goal of producing higher returns, which may also have a higher risk profile. These investments are diversified by investing globally with limitations placed on issuer concentration.
Both our U.K. and Canadian plans hedge a portion of the foreign exchange exposure between plan assets that are not denominated in the local plan currency and the local currency as the Canadian and U.K. pension liabilities will be settled in CAD and GBP, respectively.
Target Allocations
The following compares target asset allocation percentages with actual asset allocations on a weighted-average asset basis as of December 31, 2019:
| Target allocations | Actual allocations | ||
| Equities | 9.7% | 7.2% | |
| Fixed income | 64.6% | 70.1% | |
| Real estate | 6.3% | 5.5% | |
| Annuities | 15.0% | 15.1% | |
| Other | 4.4% | 2.1% |
Significant Concentration Risks
We periodically evaluate our defined benefit pension plan assets for concentration risks. As of December 31, 2019, we did not have any individual underlying asset position that composed a significant concentration of each plan's overall assets. However, we currently have significant plan assets invested in U.K., U.S. and Canadian government fixed income holdings. A provisional credit rating downgrade for any of these governments could negatively impact the asset values.
Further, as our benefit plans maintain exposure to non-government investments, a significant system-wide increase in credit spreads would also negatively impact the reported plan asset values. In general, equity and fixed income risks have been mitigated by company-specific concentration limits and by utilizing multiple equity managers. We do have significant amounts of assets invested with individual fixed income and hedge fund managers, therefore, the plans use outside investment consultants to aid in the oversight of these managers and fund performance.
Valuation Techniques
We use a variety of industry accepted valuation techniques to value our plan assets. The techniques vary depending upon instrument type. Whenever possible, we prioritize the use of observable market data in our valuation processes. We use market, income and cost approaches to value our plan assets as of period end. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for additional information on our fair value methodologies and accounting policies. We have not changed our fair value techniques used to value plan assets this year.
Major Categories of Plan Assets
As of December 31, 2019, our major categories of plan assets included the following:
| • | Cash and short-term instruments—Includes cash, trades awaiting settlement, bank deposits, short-term bills and short-term notes. Our "trades awaiting settlement" category includes payables and receivables associated with asset purchases and sales that are awaiting final cash settlement as of year-end due to the use of trade date accounting for our pension plans assets. These payables normally settle within a few business days of the purchase or sale of the respective asset. The respective assets are included in or removed from our year end plan assets and categorized in their respective asset categories in the fair value hierarchy below. We include these items in Level 1 of this hierarchy, as the values are derived from quoted prices in active markets. Short-term instruments are included in Level 2 of the fair value hierarchy as these are highly liquid instruments that are valued using observable inputs, but their asset values are not publicly quoted. |
| • | Debt securities—Includes various government and corporate fixed income securities, interest and inflation-linked assets such as bonds and swaps, collateralized securities, and other debt securities. The majority of the plans' fixed income assets trade on "over the counter" exchanges, which provides observable inputs that are the primary data used to determine each individual investment's fair value. We also use independent pricing vendors, as well as matrix pricing techniques. Matrix pricing uses observable data from other similar investments as the primary input to determine the individual security's fair value. Government and corporate fixed income securities are generally classified as Level 2 in the fair value hierarchy as they are valued using observable inputs. Assets included in our collateralized securities include mortgage backed securities and collateralized mortgage obligations, which are considered Level 3 due to the use of the significant unobservable inputs used in deriving these assets' fair values. |
| • | Equities—Includes publicly traded common and other equity-like holdings, primarily publicly traded common stock and real estate investment trusts. Equity assets are well diversified between international and domestic investments. We consider equities quoted on public exchanges as Level 1 while other assets that are not quoted on public exchanges but valued using significant observable inputs as Level 2 depending on the individual asset's characteristics. |
| • | NAV per share practical expedient—Includes our debt funds, equity funds, hedge fund of funds, infrastructure funds, real estate fund holdings and private equity funds. The market values for these funds are based on the net asset values multiplied by the number of shares owned. |
| • | Annuities—Includes non-participating annuity buy-in insurance policies purchased to cover a portion of the plan members. The fair value of non-participating contracts fluctuates based on changes in the obligation associated with covered plan members. These values are considered Level 3 due to the use of the significant unobservable inputs used in deriving these assets' fair values. |
| • | Other—Includes derivatives, repurchase agreements, recoverable taxes for taxes paid and awaiting reclaim due to the tax exempt nature of the pension plan, venture capital, and private equity. Derivatives are priced using observable inputs including yields, interest rate curves and spreads. Exchange traded derivatives are typically priced using the last trade price. Repurchase agreements are agreements where our plan has created an asset exposure using borrowed assets, creating a repurchase agreement liability, to facilitate the trade. The assets associated with the repurchase agreement and equity options are included in the other category in the fair value hierarchy, and the corresponding repurchase agreement liability is classified as Level 1 in the hierarchy, as the liability is valued using quoted prices in active markets. When determining the presentation of our target and asset allocations for repurchase agreements, we are viewing the asset type, as opposed to the investment vehicle, and accordingly include the associated assets within fixed income, specifically interest and inflation linked assets. We include recoverable tax items in Level 1 of this hierarchy, as these are cash receivables and the values are derived from quoted prices in active markets. Private equity is included in Level 3 as the values are based upon the use of unobservable inputs. |
Fair Value Hierarchy
The following presents our fair value hierarchy for our defined benefit pension plan assets excluding investments using the NAV per share practical expedient (in millions)
| Fair value measurements as of December 31, 2019 | |||||||||||||||
| Total as of December 31, 2019 | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Cash and cash equivalents | |||||||||||||||
| Cash | $ | 107.2 | $ | 107.2 | $ | — | $ | — | |||||||
| Trades awaiting settlement | 17.2 | 17.2 | — | — | |||||||||||
| Bank deposits, short-term bills and notes | 16.4 | — | 16.4 | — | |||||||||||
| Debt | |||||||||||||||
| Government securities | 711.8 | — | 711.8 | — | |||||||||||
| Corporate debt securities | 272.3 | — | 272.3 | — | |||||||||||
| Interest and inflation linked assets | 948.1 | — | 938.8 | 9.3 | |||||||||||
| Annuities | |||||||||||||||
| Buy-in annuities | 748.1 | — | — | 748.1 | |||||||||||
| Other | |||||||||||||||
| Equity options | 6.3 | 6.3 | — | — | |||||||||||
| Repurchase agreements | (923.2 | ) | (923.2 | ) | — | — | |||||||||
| Recoverable taxes | 0.5 | 0.5 | — | — | |||||||||||
| Private equity | 72.8 | — | — | 72.8 | |||||||||||
| Total fair value of investments excluding NAV per share practical expedient | $ | 1,977.5 | $ | (792.0 | ) | $ | 1,939.3 | $ | 830.2 |
The following presents our total fair value of plan assets including the NAV per share practical expedient for our defined benefit pension plan assets:
| Total as of December 31, 2019 | |||
| (In millions) | |||
| Fair value of investments excluding NAV per share practical expedient | $ | 1,977.5 | |
| Fair value of investments using NAV per share practical expedient | |||
| Debt funds | 1,636.7 | ||
| Equity funds | 1,820.5 | ||
| Real estate funds | 20.4 | ||
| Private equity funds | 87.0 | ||
| Total fair value of plan assets | $ | 5,542.1 |
The following presents our fair value hierarchy for our defined benefit pension plan assets excluding investments using the NAV per share practical expedient (in millions):
| Fair value measurements as of December 31, 2018 | |||||||||||||||
| Total as of December 31, 2018 | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Cash and cash equivalents | |||||||||||||||
| Cash | $ | 297.3 | $ | 297.3 | $ | — | $ | — | |||||||
| Trades awaiting settlement | (11.2 | ) | (11.2 | ) | — | — | |||||||||
| Bank deposits, short-term bills and notes | 34.6 | — | 34.6 | — | |||||||||||
| Debt | |||||||||||||||
| Government securities | 1,695.8 | — | 1,695.8 | — | |||||||||||
| Corporate debt securities | 1,235.5 | — | 1,235.5 | — | |||||||||||
| Interest and inflation linked assets | 1,112.4 | — | 1,065.8 | 46.6 | |||||||||||
| Collateralized debt securities | 7.2 | — | — | 7.2 | |||||||||||
| Equities | |||||||||||||||
| Common stock | 299.0 | 299.0 | — | — | |||||||||||
| Investment funds | |||||||||||||||
| Private equity | 23.8 | — | — | 23.8 | |||||||||||
| Annuities | |||||||||||||||
| Buy-in annuities | 481.1 | — | — | 481.1 | |||||||||||
| Other | |||||||||||||||
| Repurchase agreements | (1,448.8 | ) | (1,448.8 | ) | — | — | |||||||||
| Recoverable taxes | 0.4 | 0.4 | — | — | |||||||||||
| Private equity | 137.0 | — | — | 137.0 | |||||||||||
| Total fair value of investments excluding NAV per share practical expedient | $ | 3,864.1 | $ | (863.3 | ) | $ | 4,031.7 | $ | 695.7 |
The following presents our fair value hierarchy including the NAV per share practical expedient for our defined benefit pension plan assets:
| Total as of December 31, 2018 | |||
| (In millions) | |||
| Fair value of investments excluding NAV per share practical expedient | $ | 3,864.1 | |
| Fair value of investments using NAV per share practical expedient | |||
| Debt funds | 818.8 | ||
| Equity funds | 420.9 | ||
| Real estate funds | 20.0 | ||
| Private equity funds | 93.5 | ||
| Total fair value of plan assets | $ | 5,217.3 |
Fair Value: Level Three Rollforward
The following presents our Level 3 Rollforward for our defined pension plan assets excluding investments using the NAV per share practical expedient:
| Amount | |||
| (In millions) | |||
| Balance as of December 31, 2017 | $ | 469.0 | |
| Total gain or loss (realized/unrealized): | |||
| Realized gain (loss) | 13.8 | ||
| Unrealized gain (loss) included in AOCI | (18.8 | ) | |
| Purchases, issuances, settlements | 272.2 | ||
| Foreign exchange translation (loss)/gain | (40.5 | ) | |
| Balance as of December 31, 2018 | $ | 695.7 | |
| Total gain or loss (realized/unrealized): | |||
| Realized gain (loss) | 15.3 | ||
| Unrealized gain (loss) included in AOCI | (19.6 | ) | |
| Purchases, issuances, settlements | 105.2 | ||
| Foreign exchange translation (loss)/gain | 33.6 | ||
| Balance as of December 31, 2019 | $ | 830.2 |
Expected Cash Flows
In 2020, we expect to make contributions to our defined benefit pension plans of approximately $5 million and benefit payments under our OPEB plans of approximately $43 million based on foreign exchange rates as of December 31, 2019. BRI and BDL contributions to their respective defined benefit pension plans are excluded here, as they are not consolidated in our financial statements. Plan funding strategies are influenced by employee benefits, tax laws and plan governance documents.
Expected future benefit payments for defined benefit pension and OPEB plans, based on foreign exchange rates as of December 31, 2019, are as follows:
| Expected benefit payments | Pension | OPEB | ||||||
| (In millions) | ||||||||
| 2020 | $ | 308.1 | $ | 42.6 | ||||
| 2021 | $ | 308.7 | $ | 42.8 | ||||
| 2022 | $ | 308.7 | $ | 42.3 | ||||
| 2023 | $ | 309.5 | $ | 41.7 | ||||
| 2024 | $ | 309.6 | $ | 42.5 | ||||
| 2025-2029 | $ | 1,426.7 | $ | 198.5 |
Defined Contribution Plans
We offer defined contribution pension plans for the majority of our U.S., Corporate, Canadian and U.K. employees. The investment strategy for defined contribution plans are determined by each individual participant from the options we have made available as the plan sponsor. U.S. non-union and Corporate employees are eligible to participate in qualified defined contribution plans which provide for employer contributions ranging from 5% to 11% of eligible compensation (certain employees were also eligible for additional employer contributions). Effective, December 29, 2017, the plans covering the U.S. non-union and Corporate employees were merged while retaining the contribution percentages previously indicated. U.S. union employees are eligible to participate in a qualified defined contribution plan which provides for employer contributions based on factors associated with various collective bargaining agreements. The employer contributions to the U.K. and Canadian plans range from 3% to 8.5% of employee compensation. Both employee and employer contributions were made in cash in accordance with participant investment elections.
We recognized costs associated with defined contribution plans of $80.0 million, $78.5 million and $80.5 million in 2019, 2018 and 2017, respectively.
In addition, we have other deferred compensation and nonqualified defined contribution plans. We have voluntarily funded these liabilities through rabbi trusts. These assets are invested in publicly traded mutual funds whose performance is expected to closely match changes in the plan liabilities. As of December 31, 2019, and December 31, 2018, the plan liabilities were equal to the plan assets and were included in other liabilities and other assets on our consolidated balance sheets, respectively.
16. Derivative Instruments and Hedging Activities
Overview and Risk Management Policies
We use derivatives as part of our normal business operations to manage our exposure to fluctuations in interest rates, foreign currency, commodity price risk and for other strategic purposes related to our core business. We have established policies and procedures that govern the risk management of these exposures. Our primary objective in managing these exposures is to decrease the volatility of cash flows affected by changes in the underlying rates and prices.
To achieve our objectives, we enter into a variety of financial derivatives, including foreign currency exchange, commodity, interest rate, cross currency swaps as well as options. We also enter into physical hedging agreements directly with our suppliers to manage our exposure to certain commodities.
Counterparty Risk
While, by policy, the counterparties to any of the financial derivatives we enter into are major institutions with investment grade credit ratings of at least A- by Standard & Poor's (or the equivalent) or A3 by Moody's, we are exposed to credit-related losses in the event of non-performance by counterparties. This credit risk is generally limited to the unrealized gains in such contracts, should any of these counterparties fail to perform as contracted.
We have established a counterparty credit policy and guidelines that are monitored and reported to management according to prescribed guidelines to assist in managing this risk. As an additional measure, we utilize a portfolio of institutions either headquartered or operating in the same countries that we conduct our business. In calculating the fair value of our derivative balances, we also record an adjustment to recognize the risk of counterparty credit and our own non-performance risk, as appropriate.
Price and Liquidity Risks
We base the fair value of our derivative instruments upon market rates and prices. The volatility of these rates and prices are dependent on many factors that cannot be forecasted with reliable accuracy. The current fair values of our contracts could differ significantly from the cash settled values with our counterparties. As such, we are exposed to price risk related to unfavorable changes in the fair value of our derivative contracts.
We may be forced to cash settle all or a portion of our derivative contracts before the expected settlement date upon the occurrence of certain contractual triggers including a change of control, termination event or other breach of agreement. This could have a negative impact on our liquidity. For derivative contracts that we have designated as hedging instruments, early cash settlement would result in the timing of our hedge settlement not being matched to the cash settlement of the forecasted transaction or firm commitment. We may also decide to cash settle all or a portion of our derivative contracts before the expected settlement date through negotiations with our counterparties, which could also impact our cash position.
Due to the nature of our counterparty agreements, we are not able to net positions with the same counterparty across business units. Thus, in the event of default, we may be required to early settle all out-of-the-money contracts, without the benefit of netting the fair value of any in-the-money positions against this exposure.
Collateral
We do not receive and are not required to post collateral unless a change of control event occurs. This termination event would give either party the right to early terminate all outstanding swap transactions in the event that the other party consolidates, merges with, or transfers all or substantially all of its assets to, another entity, and the creditworthiness of the surviving entity that has assumed such party's obligations is materially weaker than that of such party. As of December 31, 2019, we did not have any collateral posted with any of our counterparties.
Derivative Accounting Policies
Overview
Our foreign currency forwards and our forward starting interest rate swaps are designated in hedging relationships as cash flow hedges, and our cross currency swaps are designated as net investment hedges. Prior to settlements discussed below, our
interest rate swaps were designated as fair value hedges. In certain situations, we may execute derivatives that do not qualify for, or we do not otherwise seek, hedge accounting but are determined to be important for managing risk. For example, our commodity swaps and commodity options are not designated in hedge accounting relationships. These outstanding economic hedges are measured at fair value on our consolidated balance sheets with changes in fair value recorded in earnings. We have historically elected to apply the NPNS exemption to certain contracts, as applicable. These contracts are typically transacted with our suppliers and include risk management features that allow us to fix the price on specific volumes of purchases for specified delivery periods. We also consider whether any provisions in our contracts represent embedded derivative instruments as defined in authoritative accounting guidance and apply the appropriate accounting.
Hedge Accounting Policies
We formally document all relationships receiving hedge accounting treatment between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions pursuant to prescribed guidance. We also formally assess effectiveness both at the hedge's inception and on an ongoing basis, specifically whether the derivatives that are used in hedging transactions have been highly effective in mitigating the risk designated as being hedged and whether those hedges may be expected to remain highly effective in future periods. Specific to net investment hedges, we have elected to use the spot-to-spot methodology to assess effectiveness.
We discontinue hedge accounting prospectively when (1) the derivative is no longer highly effective in offsetting changes in the cash flows of a forecasted future transaction; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) management determines that designating the derivative as a hedging instrument is no longer appropriate; or (5) management decides to cease hedge accounting.
When we discontinue hedge accounting prospectively, but it continues to be probable that the forecasted transaction will occur in the originally expected period, the existing gain or loss on the derivative remains in AOCI for cash flow hedges and net investment hedges or in the carrying value of the hedged item for fair value hedges and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses in AOCI are recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its fair value on the consolidated balance sheets until maturity, recognizing future changes in the fair value in current period earnings.
Significant Derivative/Hedge Positions
Interest Rate Swaps
During the fourth quarter of 2017, we voluntarily settled our interest rate swaps with an aggregate notional amount of $1.0 billion, which were previously entered into earlier in 2017 to economically convert our fixed rate $1.0 billion 2017 USD Notes to floating rate debt based on a credit spread plus the one-month LIBOR rate. This settlement resulted in net cash payments of $3.5 million. These swaps were previously designated as fair value hedges with the changes in fair value of the hedged item recognized in earnings. At the time of settlement we ceased adjusting the carrying value of the two $500 million notes for the fair value movements and these cumulative adjustments are now being amortized as a charge to interest expense over the expected remaining term of the respective note. See Note 11, "Debt" for additional details.
Separately, in prior years, we also entered into similar interest rate swap agreements to economically convert our fixed rate $500 million 3.5% notes due 2022 to floating rate debt. These interest rate swap agreements were also previously voluntarily cash settled, at which time we ceased adjusting the carrying value of the notes for the fair value movements. The cumulative adjustments which increased the carrying value of the notes are being amortized as a benefit to interest expense over the expected remaining term of the notes. See Note 11, "Debt" for additional details.
Net Investment Hedges
On July 7, 2016, we issued EUR 800.0 million senior notes maturing July 15, 2024 to partially fund the Acquisition. Separately, on March 15, 2017, we issued an aggregate of EUR 500 million, 0.35% plus three-month EURIBOR floating rate senior notes due March 15, 2019. Concurrent with the issuances of both sets of Notes, we simultaneously designated the principals as net investment hedges of our investment in our Europe business in order to hedge a portion of the foreign currency translational impacts and, accordingly, record the changes in the carrying value of the 2016 EUR Notes and 2017 EUR Notes due to fluctuations in the spot rate to AOCI. In March 2019, we repaid the 2017 EUR Notes. See Note 11, "Debt" for further discussion.
Forward Starting Interest Rate Swaps
Forward starting interest rate swaps are instruments we use to manage our exposure to the volatility of the interest rates associated with future interest payments on a forecasted debt issuance. During the third quarter of 2018, we entered into forward starting interest rate swaps with notional amounts totaling $1.5 billion. The forward starting interest rate swaps have an effective date of July 2018 and termination dates of July 2021, May 2022 and July 2026, mirroring the terms of the forecasted debt issuances. Weighted-average interest rates on the swaps are fixed at 3.00%, 3.01% and 3.10% for July 2021, May 2022 and July 2026, respectively. Under the agreements we are required to early terminate these swaps at the time we expect to issue the related forecasted debt. We have designated these contracts as cash flow hedges. As a result, the unrealized mark-to-market gains or losses will be recorded to AOCI until termination at which point the realized gain or loss of these swaps at issuance of the hedged debt will be reclassified from AOCI and amortized to interest expense over the term of the hedged debt.
In 2015 we entered into forward starting interest rate swaps with a notional of CAD 600 million in order to manage our exposure to the volatility of the interest rates associated with the future interest payments on the forecasted CAD debt issuances, which ultimately became the 2015 Notes and a portion of the 2016 Notes. The swaps had an effective date of September 2015 and a termination date of September 2025 mirroring the terms of the initially forecasted CAD debt issuance. Under these agreements we were required to early terminate these swaps at the approximate time we issued the previously forecasted debt. We had designated these contracts as cash flow hedges and accordingly, a portion of the CAD 39.2 million ($29.5 million at settlement) loss on the forward starting interest rate swaps is being reclassified from AOCI and amortized to interest expense over the remaining term of the 2015 Notes, due in September 2020, and over a portion of the CAD 500 million notes due in 2026 up to the full 10-year term of the interest rate swap agreements.
Cross Currency Swaps
Effective March 20, 2019, we entered into cross currency swap agreements having a total notional value of approximately EUR 353 million ($400 million upon execution) in order to hedge a portion of the foreign currency translational impacts of our European investment. As a result of the swaps, we economically converted a portion of our $1.0 billion 2.1% senior notes due 2021 and associated interest to EUR denominated, which will result in a EUR interest rate to be received at 0.71%.
Separately, effective April 3, 2019, we voluntarily early terminated our $500 million cross currency swaps due in 2020 under which we were receiving EUR interest payments at a rate received of 0.85%, and concurrently entered into new cross currency swap agreements having a total notional of approximately EUR 445 million ($500 million upon execution) in order to hedge a portion of the foreign currency translation impacts of our European investment. As a result of the swaps, we economically converted our 500 million 2.25% senior notes due 2020 and associated interest to EUR denominated, which will result in a EUR interest rate to be received of 0.68%. The termination of the original $500 million cross currency swaps resulted in cash receipts of approximately $47 million which were classified as investing activities in our consolidated statement of cash flows during the second quarter of 2019.
We have designated each of these cross currency swaps as net investment hedges and accordingly, record changes in fair value due to fluctuations in the spot rate to AOCI. The changes in fair value of the swaps attributable to changes other than those due to fluctuations in the spot rate are excluded from the assessment of hedge effectiveness and recorded to interest expense over the life of the hedge.
Foreign Currency Forwards
Prior to issuing the 2017 EUR Notes on March 15, 2017, we entered into foreign currency forward agreements in the first quarter of 2017 with a total notional amount of EUR 499 million, representing a majority of the anticipated net proceeds from the issuance of the respective 2017 EUR Notes, to economically hedge the foreign currency exposure of the associated notes against the USD prior to issuance and to convert the proceeds to USD upon issuance through gross settlement. We settled these foreign currency forwards on March 15, 2017, resulting in a loss of $8.3 million. These foreign currency forwards were not designated in hedge accounting relationships, and, accordingly, the mark-to-market fair value adjustments and resulting losses were recorded to other income (expense).
We have financial foreign exchange forward contracts in place to manage our exposure to foreign currency fluctuations. We hedge foreign currency exposure related to certain royalty agreements, exposure associated with the purchase of production inputs and imports that are denominated in currencies other than the functional entity's local currency, and other foreign exchanges exposures. These contracts have been designated as cash flow hedges of forecasted foreign currency transactions. We use foreign currency forward contracts to hedge these future forecasted transactions up to a 60 month horizon.
Commodity Swaps and Options
We have financial commodity swap and option contracts in place to hedge changes in the prices of natural gas, aluminum, including surcharges relating to our aluminum exposures, corn, barley and diesel. These contracts allow us to swap our floating exposure to changes in these commodity prices for a fixed rate. These contracts are not designated in hedge accounting relationships. As such, changes in fair value of these derivatives are recorded in cost of goods sold in the consolidated statements of operations. We hedge forecasted purchases of natural gas, aluminum, corn and diesel each up to 60 months out in the future for use in our supply chain, in line with our risk management policy. Further, we hedge forecasted purchases of barley based on crop year and physical inventory management. For purposes of measuring segment operating performance, the unrealized changes in fair value of the swaps not designated in hedge accounting relationships are reported in Corporate outside of the segment specific operating results until such time that the exposure we are managing is realized. At that time we reclassify the gain or loss from Corporate to the operating segment, allowing our operating segments to realize the economic effects of the derivative without the resulting unrealized mark-to-market volatility.
Warrants
On October 4, 2018, in connection with the formation of the Truss joint venture, as discussed further in Note 4, "Investments," our joint venture partner, HEXO, issued to our Canadian subsidiary a total of 11.5 million warrants to purchase common shares of HEXO at a strike price of CAD 6.00 per share at any time during the three year period following the formation of the joint venture. The fair value of the warrants at issuance of approximately $45 million was recorded as a non-current asset and as an adjustment to paid-in capital, net of tax. All changes in the fair value of the warrants subsequent to issuance are recorded in other income (expense), net on the consolidated statements of operations.
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 appropriate. The fair value of our warrants to acquire common shares of HEXO at a strike price of CAD 6.00 per share are estimated using the Black-Scholes option-pricing model. As of December 31, 2019 and December 31, 2018, the assumptions used to estimate the fair value of the HEXO warrants are as follows:
| As of December 31, 2019 | As of December 31, 2018 | ||||
| Expected term (years) | 1.75 | 2.75 | |||
| Estimated volatility | 81.45 | % | 88.71 | % | |
| Risk-free interest rate | 1.69 | % | 2.04 | % | |
| Expected dividend yield | — | % | — | % |
The expected term is based on the contractual maturity date of the warrants. Estimated volatility is based on a blend of implied volatility and historical volatility of HEXO's stock. The risk-free rate utilized is based on a zero-coupon Canadian Treasury security yield with a remaining term equal to the expected term of the warrants. The expected dividend yield is determined by historical dividend levels.
The table below summarizes our derivative assets and liabilities that were measured at fair value as of December 31, 2019 and December 31, 2018. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for further discussion related to measuring the fair value of derivative instruments.
| Fair Value Measurements as of December 31, 2019 | |||||||||||||||
| Total as of December 31, 2019 | Quoted prices in active markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (In millions) | |||||||||||||||
| Cross currency swaps | $ | 10.0 | $ | — | $ | 10.0 | $ | — | |||||||
| Interest rate swaps | (111.5 | ) | — | (111.5 | ) | — | |||||||||
| Foreign currency forwards | 2.1 | — | 2.1 | — | |||||||||||
| Commodity swaps and options | (41.2 | ) | — | (41.2 | ) | — | |||||||||
| Warrants | 2.7 | — | 2.7 | — | |||||||||||
| Total | $ | (137.9 | ) | $ | — | $ | (137.9 | ) | $ | — |
| Fair Value Measurements as of December 31, 2018 | |||||||||||||||
| Total as of December 31, 2018 | Quoted prices in active markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (In millions) | |||||||||||||||
| Cross currency swaps | $ | 36.5 | $ | — | $ | 36.5 | $ | — | |||||||
| Interest rate swaps | (12.3 | ) | — | (12.3 | ) | — | |||||||||
| Foreign currency forwards | 16.3 | — | 16.3 | — | |||||||||||
| Commodity swaps and options | (42.0 | ) | — | (42.0 | ) | — | |||||||||
| Warrants | 19.6 | — | 19.6 | — | |||||||||||
| Total | $ | 18.1 | $ | — | $ | 18.1 | $ | — |
As of December 31, 2019 and December 31, 2018, we had no significant transfers between Level 1 and Level 2. New derivative contracts transacted during 2019 were all included in Level 2.
Results of Period Derivative Activity
The following tables include the year-to-date results of our derivative activity in our consolidated balance sheets as of December 31, 2019 and December 31, 2018, and our consolidated statements of operations for the years ended December 31, 2019, December 31, 2018 and December 31, 2017.
Fair Value of Derivative Instruments in the Consolidated Balance Sheets (in millions):
| December 31, 2019 | |||||||||||||||
| Asset derivatives | Liability derivatives | ||||||||||||||
| Notional amount | Balance sheet location | Fair value | Balance sheet location | Fair value | |||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||
| Cross currency swaps | $ | 900.0 | Other current assets | $ | 1.8 | Accounts payable and other current liabilities | $ | — | |||||||
| Other non-current assets | 8.2 | Other liabilities | — | ||||||||||||
| Interest rate swaps | $ | 1,500.0 | Other non-current assets | — | Other liabilities | (111.5 | ) | ||||||||
| Foreign currency forwards | $ | 237.9 | Other current assets | 1.9 | Accounts payable and other current liabilities | (0.8 | ) | ||||||||
| Other non-current assets | 1.4 | Other liabilities | (0.4 | ) | |||||||||||
| Total derivatives designated as hedging instruments | $ | 13.3 | $ | (112.7 | ) | ||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||
| Commodity swaps(1) | $ | 598.4 | Other current assets | $ | 5.7 | Accounts payable and other current liabilities | $ | (36.4 | ) | ||||||
| Other non-current assets | 1.0 | Other liabilities | (11.5 | ) | |||||||||||
| Commodity options(1) | $ | 18.4 | Other current assets | — | Accounts payable and other current liabilities | — | |||||||||
| Warrants | $ | 53.1 | Other non-current assets | 2.7 | Other liabilities | — | |||||||||
| Total derivatives not designated as hedging instruments | $ | 9.4 | $ | (47.9 | ) |
| December 31, 2018 | |||||||||||||||
| Asset derivatives | Liability derivatives | ||||||||||||||
| Notional amount | Balance sheet location | Fair value | Balance sheet location | Fair value | |||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||
| Cross currency swaps | $ | 500.0 | Other non-current assets | $ | 36.5 | Other liabilities | $ | — | |||||||
| Interest rate swaps | $ | 1,500.0 | Other non-current assets | — | Other liabilities | (12.3 | ) | ||||||||
| Foreign currency forwards | $ | 338.6 | Other current assets | 7.3 | Accounts payable and other current liabilities | (0.1 | ) | ||||||||
| Other non-current assets | 9.2 | Other liabilities | (0.1 | ) | |||||||||||
| Total derivatives designated as hedging instruments | $ | 53.0 | $ | (12.5 | ) | ||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||
| Commodity swaps(1) | $ | 868.4 | Other current assets | $ | 12.1 | Accounts payable and other current liabilities | $ | (37.9 | ) | ||||||
| Other non-current assets | 6.1 | Other liabilities | (22.3 | ) | |||||||||||
| Commodity options(1) | $ | 46.6 | Other current assets | 0.1 | Accounts payable and other current liabilities | (0.1 | ) | ||||||||
| Warrants | $ | 50.6 | Other non-current assets | $ | 19.6 | Other liabilities | — | ||||||||
| Total derivatives not designated as hedging instruments | $ | 37.9 | $ | (60.3 | ) |
| (1) | Notional includes offsetting buy and sell positions, shown in terms of absolute value. Buy and sell positions are shown gross in the asset and/or liability position, as appropriate. |
Items Designated and Qualifying as Hedged Items in Fair Value Hedging Relationships in the Consolidated Balance Sheets (in millions):
| Line item in the balance sheet in which the hedged item is included | Carrying amount of the hedged assets/liabilities | Cumulative amount of fair value hedging adjustment(s) in the hedged assets/liabilities**(1)** Increase/(Decrease) | ||||||||||||||
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2019 | As of December 31, 2018 | |||||||||||||
| (In millions) | ||||||||||||||||
| Current portion of long-term debt and short-term borrowings | $ | — | $ | — | $ | (0.2 | ) | $ | (0.2 | ) | ||||||
| Long-term debt | $ | — | $ | — | $ | 6.5 | $ | 8.3 |
(1) Entire balances relate to hedging adjustments on discontinued hedging relationships.
The Pretax Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) (in millions):
| For the year ended December 31, 2019 | ||||||||||
| Derivatives in cash flow hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | |||||||
| Forward starting interest rate swaps | $ | (99.2 | ) | Interest expense | $ | (3.0 | ) | |||
| Foreign currency forwards | (12.1 | ) | Cost of goods sold | 3.1 | ||||||
| Other income (expense), net | (0.7 | ) | ||||||||
| Total | $ | (111.3 | ) | $ | (0.6 | ) |
| For the year ended December 31, 2019 | ||||||||||||||||
| Derivatives in net investment hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)****(1) | |||||||||||
| Cross currency swaps | $ | 19.8 | Interest expense | $ | — | Interest expense | $ | 23.5 | ||||||||
| Total | $ | 19.8 | $ | — | $ | 23.5 |
| For the year ended December 31, 2019 | ||||||||||||||||
| Non-derivative financial instruments in net investment hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | |||||||||||
| EUR 800 million notes due 2024 | $ | 20.4 | Other income (expense), net | $ | — | Other income (expense), net | $ | — | ||||||||
| EUR 500 million notes due 2019 | 10.1 | Other income (expense), net | — | Other income (expense), net | — | |||||||||||
| Total | $ | 30.5 | $ | — | $ | — |
| For the year ended December 31, 2018 | ||||||||||
| Derivatives in cash flow hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | |||||||
| Forward starting interest rate swaps | $ | (12.3 | ) | Interest expense | $ | (3.0 | ) | |||
| Foreign currency forwards | 26.8 | Cost of goods sold | (0.2 | ) | ||||||
| Other income (expense), net | (0.2 | ) | ||||||||
| Total | $ | 14.5 | $ | (3.4 | ) |
| For the year ended December 31, 2018 | ||||||||||||||||
| Derivatives in net investment hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)****(1) | |||||||||||
| Cross currency swaps | $ | 36.5 | Interest expense | $ | — | Interest expense | $ | 10.7 | ||||||||
| Total | $ | 36.5 | $ | — | $ | 10.7 |
| (1) | Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and period amortization is recorded in other comprehensive income. |
| For the year ended December 31, 2018 | ||||||||||||||||
| Non-derivative financial instruments in net investment hedge relationships | Amount of gain (loss) recognized in OCI on derivative | Location of gain (loss) reclassified from AOCI into income | Amount of gain (loss) recognized from AOCI on derivative | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | |||||||||||
| EUR 800 million notes due 2024 | $ | 43.0 | Other income (expense), net | $ | — | Other income (expense), net | $ | — | ||||||||
| EUR 500 million notes due 2019 | 26.9 | Other income (expense), net | — | Other income (expense), net | — | |||||||||||
| Total | $ | 69.9 | $ | — | $ | — |
| For the year ended December 31, 2017 | ||||||||||||||||
| 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 | $ | (3.7 | ) | Interest expense | $ | — | |||||||
| Foreign currency forwards | (22.7 | ) | Cost of goods sold | 3.7 | Cost of goods sold | — | ||||||||||
| Other income (expense), net | (2.0 | ) | Other income (expense), net | — | ||||||||||||
| Total | $ | (22.7 | ) | $ | (2.0 | ) | $ | — |
| For the year ended December 31, 2017 | ||||||||||||||||
| Non-derivative financial instruments 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) | |||||||||||
| EUR 800 million notes due 2024 | $ | (119.0 | ) | Other income (expense), net | $ | — | Other income (expense), net | $ | — | |||||||
| EUR 500 million notes due 2019 | (63.6 | ) | Other income (expense), net | — | Other income (expense), net | — | ||||||||||
| Total | $ | (182.6 | ) | $ | — | $ | — |
| For the year ended December 31, 2017 | ||||||
| Derivatives in fair value hedge relationship | Amount of gain (loss) recognized in income on derivative | Location of gain (loss) recognized in income | ||||
| Interest rate swaps | $ | (3.5 | ) | Interest expense | ||
| Total | $ | (3.5 | ) |
We expect net losses of approximately $2 million (pretax) recorded in AOCI as of December 31, 2019 will be reclassified into earnings within the next 12 months. For derivatives designated in cash flow hedge relationships, the maximum length of time over which forecasted transactions are hedged as of December 31, 2019 is approximately 4 years, as well as those related to our forecasted debt issuances in 2021, 2022, and 2026.
The Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Operations (in millions):
| For the year ended December 31, 2019 | |||||||||||
| Location and amount of gain (loss) recognized in income on fair value and cash flow hedging relationships**(1)** | |||||||||||
| Cost of goods sold | Other income (expense), net | Interest expense | |||||||||
| Total amount of income and expense line items presented in the consolidated statement of operations in which the effects of fair value or cash flow hedges are recorded | $ | (6,378.2 | ) | $ | (14.7 | ) | $ | (280.9 | ) | ||
| Gain (loss) on cash flow hedging relationships: | |||||||||||
| Forward starting interest rate swaps | |||||||||||
| Amount of gain (loss) reclassified from AOCI into income | $ | — | $ | — | $ | (3.0 | ) | ||||
| Foreign currency forwards | |||||||||||
| Amount of gain (loss) reclassified from AOCI into income | $ | 3.1 | $ | (0.7 | ) | $ | — |
| For the year ended December 31, 2018 | |||||||||||
| Location and amount of gain (loss) recognized in income on fair value and cash flow hedging relationships**(1)** | |||||||||||
| Cost of goods sold | Other income (expense), net | Interest expense | |||||||||
| Total amount of income and expense line items presented in the consolidated statement of operations in which the effects of fair value or cash flow hedges are recorded | $ | (6,584.8 | ) | $ | (12.0 | ) | $ | (306.2 | ) | ||
| Gain (loss) on cash flow hedging relationships: | |||||||||||
| Forward starting interest rate swaps | |||||||||||
| Amount of gain (loss) reclassified from AOCI into income | $ | — | $ | — | $ | (3.0 | ) | ||||
| Foreign currency forwards | |||||||||||
| Amount of gain (loss) reclassified from AOCI into income | $ | (0.2 | ) | $ | (0.2 | ) | $ | — |
(1) We had no outstanding fair value hedges during 2019 or 2018.
The Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Operations (in millions):
| For the year ended December 31, 2019 | ||||||
| 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 | $ | (26.8 | ) | ||
| Warrants | Other income (expense), net | (17.8 | ) | |||
| Total | $ | (44.6 | ) |
| For the year ended December 31, 2018 | ||||||
| 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 | $ | (110.5 | ) | ||
| Warrants | Other income (expense), net | (23.8 | ) | |||
| Total | $ | (134.3 | ) |
| For the year ended December 31, 2017 | ||||||
| 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 | $ | 150.1 | |||
| Foreign currency swaps | Other income (expense), net | (8.3 | ) | |||
| Total | $ | 141.8 |
Lower commodity prices relative to our hedged positions, primarily in aluminum and diesel during 2019 and primarily in aluminum during 2018, drove the total losses recognized in income related to commodity swaps for the years ended December 31, 2019 and December 31, 2018. Contrarily, higher commodity prices, primarily in aluminum, during 2017 resulted in the total gain recognized in income related to commodity swaps for the year ended December 31, 2017.
17. Accounts Payable and Other Current Liabilities
| As of | |||||||
| December 31, 2019 | December 31, 2018 | ||||||
| (In millions) | |||||||
| Accounts payable and accrued trade payables | $ | 1,568.1 | $ | 1,616.8 | |||
| Accrued compensation | 260.9 | 224.6 | |||||
| Accrued excise and other non-income related taxes | 278.3 | 244.1 | |||||
| Accrued interest | 107.0 | 112.6 | |||||
| Accrued selling and marketing costs | 118.7 | 120.0 | |||||
| Container liability | 123.5 | 163.0 | |||||
| Operating leases | 46.6 | — | |||||
| Other(1) | 264.2 | 225.3 | |||||
| Accounts payable and other current liabilities | $ | 2,767.3 | $ | 2,706.4 |
| (1) | Includes current liabilities related to derivatives, income taxes, pensions and other postretirement benefits, mandatorily redeemable noncontrolling interest liabilities, and various other accrued expenses. |
18. Commitments and Contingencies
Letters of Credit
As of December 31, 2019, we had $60.9 million outstanding in letters of credit with financial institutions. These letters primarily expire throughout 2020 and $19.3 million of the letters contain a feature that automatically renews the letter for an additional year if no cancellation notice is submitted. These letters of credit are being maintained as security for deferred compensation payments, reimbursements to insurance companies, reimbursements to the trustee for pension payments,
deductibles or retention payments made on our behalf, various payments due to governmental agencies, operations of underground storage tanks and other general business purposes, and are not included on our consolidated balance sheets.
Guarantees and Indemnities
We guarantee indebtedness and other obligations to banks and other third parties for some of our equity method investments and consolidated subsidiaries. As of December 31, 2019 and December 31, 2018, the consolidated balance sheets include liabilities related to these guarantees of $37.7 million and $35.9 million, respectively. See Note 4, "Investments" for further detail.
Kaiser
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 certain exposures related to tax, civil and labor contingencies arising prior to FEMSA's purchase of Kaiser. In addition, we provided an indemnity to FEMSA for losses Kaiser may incur with respect to tax claims associated with certain previously utilized purchased tax credits. We settled a portion of our tax credit indemnity obligation during 2010. The maximum potential claims amount for the remainder of the purchased tax credits was $87.0 million as of December 31, 2019. Our total estimate of the indemnity liability as of December 31, 2019 was $10.0 million, of which $4.0 million was classified as a current liability and $6.0 million classified as non-current.
Our estimates consider a number of scenarios for the ultimate resolution of these issues, the probabilities of which are influenced not only by legal developments in Brazil but also by management's intentions with regard to various alternatives that could present themselves leading to the ultimate resolution of these issues. The liabilities are impacted by changes in estimates regarding amounts that could be paid, the timing of such payments, adjustments to the probabilities assigned to various scenarios and foreign currency exchange rates. Our indemnity also covers fees and expenses that Kaiser incurs to manage the cases through the administrative and judicial systems.
Additionally, we also provided FEMSA with indemnity related to all other tax, civil, and labor contingencies existing as of the date of sale. In this regard, however, FEMSA assumed their full share of all of these contingent liabilities that had been previously recorded and disclosed by us prior to the sale on January 13, 2006. However, we may have to provide indemnity to FEMSA if those contingencies settle at amounts greater than those amounts previously recorded or disclosed by us. We will be able to offset any indemnity exposures in these circumstances with amounts that settle favorably to amounts previously recorded. Our exposure related to these indemnity claims is capped at the amount of the sales price of the 68% equity interest of Kaiser, which was $68.0 million. As a result of these contract provisions, our estimates include not only probability-weighted potential cash outflows associated with indemnity provisions, but also probability-weighted cash inflows that could result from favorable settlements, which could occur through negotiation or settlement programs arising from the federal or any of the various state governments in Brazil. The recorded value of the tax, civil, and labor indemnity liability was $4.2 million as of December 31, 2019, which is classified as non-current. For the remaining portion of our indemnity obligations, not deemed probable, we continue to utilize probability-weighted scenarios in determining the value of the indemnity obligations.
Future settlement procedures and related negotiation activities associated with these contingencies are largely outside of our control. The sale agreement requires annual cash settlements relating to the tax, civil, and labor indemnities. Indemnity obligations related to purchased tax credits must be settled upon notification of FEMSA's settlement. Due to the uncertainty involved with the ultimate outcome and timing of these contingencies, significant adjustments to the carrying values of the indemnity obligations have been recorded to date, and additional future adjustments may be required. These liabilities are denominated in Brazilian Reais and are therefore, subject to foreign exchange gains or losses. As a result, these foreign exchange gains and losses are the only impacts recorded within other income (expense), net.
The table below provides a summary of reserves associated with the Kaiser indemnity obligations from December 31, 2016, through December 31, 2019:
| Total indemnity reserves | |||
| (In millions) | |||
| Balance as of December 31, 2016 | $ | 17.6 | |
| Changes in estimates | — | ||
| Foreign exchange impacts | (0.3 | ) | |
| Balance as of December 31, 2017 | $ | 17.3 | |
| Changes in estimates | — | ||
| Foreign exchange impacts | (2.6 | ) | |
| Balance as of December 31, 2018 | $ | 14.7 | |
| Changes in estimates | — | ||
| Foreign exchange impacts | (0.5 | ) | |
| Balance as of December 31, 2019 | $ | 14.2 |
Purchase Obligations
We have various long-term supply contracts and distribution agreements with unaffiliated third parties and our joint venture partners to purchase materials used in production and packaging and to provide distribution services. The supply contracts provide that we purchase certain minimum levels of materials throughout the terms of the contracts. Additionally, we have various long-term non-cancelable commitments for advertising, sponsorships and promotions, including marketing at sports arenas, stadiums and other venues and events. The future aggregate minimum required commitments under these purchase obligations are shown in the table below based on foreign exchange rates as of December 31, 2019. The amounts in the table do not represent all anticipated payments under long-term contracts. Rather, they represent unconditional, non-cancelable purchase commitments under contracts with remaining terms greater than one year.
| Year | Supply and Distribution | Advertising and Promotions | ||||||
| (Amounts in millions) | ||||||||
| 2020 | $ | 467.6 | $ | 100.2 | ||||
| 2021 | 372.2 | 97.9 | ||||||
| 2022 | 341.3 | 77.6 | ||||||
| 2023 | 225.4 | 63.8 | ||||||
| 2024 | 118.6 | 60.8 | ||||||
| Thereafter | 458.4 | 155.0 | ||||||
| Total | $ | 1,983.5 | $ | 555.3 |
Total purchases under our supply and distribution contracts in 2019, 2018 and 2017 were approximately $1.0 billion, $1.1 billion and $1.2 billion, respectively. Total marketing and advertising expense was approximately $1.2 billion, $1.2 billion and $1.3 billion in 2019, 2018 and 2017, respectively.
Litigation and Other Disputes and Environmental
Related to litigation, other disputes and environmental issues, we have an aggregate accrued contingent liability of $16.2 million and $13.7 million as of December 31, 2019 and December 31, 2018, respectively. While we cannot predict the eventual aggregate cost for litigation, other disputes and environmental matters in which we are currently involved, we believe adequate reserves have been provided for losses that are probable and estimable. Additionally, as noted below, there are certain loss contingencies that we deem reasonably possible for which a range of loss is not estimable at this time; for all other matters, we believe that any reasonably possible losses in excess of the amounts accrued are immaterial to our consolidated financial statements.
We are involved in other disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, other than as
noted, none of these disputes or legal actions are expected to have a material impact on our business, consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.
In 2017, a local jurisdictional court ruled in our favor related to our challenge of the validity of historical assessments from a local country regulatory authority related to indirect tax calculations in our Europe operations. Based on this favorable ruling, we released a previously recorded provision in the first quarter of 2017 as we no longer deemed this loss probable. This resulted in a benefit of approximately $50 million, recorded within the excise taxes line item on the consolidated statement of operations during the year ended December 31, 2017.
On February 12, 2018, Stone Brewing Company filed a trademark infringement lawsuit in federal court in the Southern District of California against MillerCoors LLC alleging that the Keystone brand has “rebranded” itself as “Stone” and is marketing itself in a manner confusingly similar to Stone Brewing Company's registered Stone trademark. Stone Brewing Company seeks treble damages in the amount of MillerCoors’ profit from Keystone sales. MillerCoors subsequently filed an answer and counterclaims against Stone Brewing Company. On May 31, 2018, Stone Brewing Company filed a motion to dismiss MillerCoors' counterclaims and for a preliminary injunction seeking to bar MillerCoors from continuing to use “STONE” on Keystone Light cans and related marketing materials. In March 2019, the court denied Stone Brewing Company’s motion for preliminary injunction and its motion to dismiss MillerCoors’ counterclaims. No trial date has been scheduled. We intend to vigorously assert and defend our rights in this lawsuit. A range of potential loss is not estimable at this time.
In December 2018, the U.S. Department of Treasury issued a regulation that impacts our ability to claim a refund of certain federal duties, taxes, and fees paid for beer sold between the U.S. and certain other countries effective in February 2019. As a result, based on the terms of the regulation, it is the U.S. Department of Treasury’s view that future claims will no longer be accepted, and we may be further unable to collect historically claimed, but not yet received, refunds of approximately $40 million, which are recorded within other non-current assets on our consolidated balance sheet as of December 31, 2019. In January 2020, the United States Court of International Trade issued an opinion and order ruling the challenged portions of this regulation dealing with refunds of certain federal duties, taxes and fees paid with respect to certain imported beer, to the extent of certain exported beer, to be unlawful. The U.S. Department of Treasury has until February 18, 2020 to provide a response to the proposed final judgment. We will continue to monitor this matter including our ability to collect our historically claimed refunds as well our ability to claim ongoing refunds should the court's decision remain upheld.
On February 15, 2019, two purported stockholders filed substantially similar putative class action complaints against the Company, Mark R. Hunter, and Tracey I. Joubert (the “Defendants”) in the United States District Court for the District of Colorado (the “Colorado District Court”), and in the United States District Court for the Northern District of Illinois (the “Illinois District Court”). On February 21, 2019, another purported stockholder filed a substantially similar complaint in the Colorado District Court. The plaintiffs purport to represent a class of the Company’s stockholders and assert that the Defendants violated Sections 10(b) and 20(a) of the Exchange Act by allegedly making false and misleading statements or omissions regarding the Company’s restatement of consolidated financial statements for the years ended December 31, 2016 and December 31, 2017, and that the Company purportedly lacked adequate internal controls over financial reporting. The plaintiffs seek, among other things, an unspecified amount of damages and reasonable attorneys’ fees, expert fees and other costs. On April 16, 2019, motions to consolidate and appoint a lead plaintiff were filed in each case. On May 24, 2019, the securities class action suit filed with the Illinois District Court was transferred to the Colorado District Court, but was voluntarily dismissed on July 25, 2019. On October 2, 2019, the class action lawsuits originally filed in Colorado District Court were consolidated, and, on October 3, 2019, the court appointed a lead plaintiff and lead counsel for the consolidated case. On December 9, 2019, the lead plaintiff filed its amended complaint alleging that the Defendants made false statements and material omissions to the market beginning in February 2017 and ending in February 2019, which, it alleges, misled the market as to the strength of our financial condition and internal control processes related to financial accounting. The amended complaint further alleges that the Company and the Defendants caused the Company to falsely report its financial results by overstating retained earnings, net income, and tax benefits and understating deferred tax liabilities in an effort to inflate the price of our common stock. We filed a motion to dismiss the amended complaint on January 23, 2020. We intend to defend the claims vigorously. A range of potential loss is not estimable at this time.
On March 26, 2019, a purported stockholder filed a purported shareholder derivative action in Colorado District Court against the Company’s board of directors and certain current officers (the “Individual Defendants”), and the Company as a nominal defendant. On May 14, 2019, another purported stockholder filed a substantially similar complaint in the Colorado District Court. On August 12, 2019, a third derivative complaint was filed in Colorado District Court by purported stockholders. All three derivative complaints assert claims against the Individual Defendants for breaches of fiduciary duty and unjust enrichment arising out of the Company’s dissemination to shareholders of purportedly materially misleading and inaccurate information in connection with the Company’s restatement of consolidated financial statements for the years ended December 31, 2016 and December 31, 2017. The complaints further allege that the Company lacked adequate internal controls over
financial reporting. The third derivative complaint filed in August also alleges the Individual Defendants violated Sections 14(a) and 20(a) of the Exchange Act by issuing misleading statements in the Company's proxy statement. The relief sought in the complaints include changes to the Company’s corporate governance procedures, unspecified damages, restitution, and attorneys’ fees, expert fees, other costs and such other relief as the court deems proper. The parties have agreed to administratively stay the proceedings in the various shareholder derivative actions until the federal district court rules on the company's motion to dismiss filed on January 23, 2020 in the above mentioned consolidated securities action. All three derivative actions have been administratively closed, subject to being reopened for good cause shown. A range of potential loss is not estimable at this time.
In June 2019, the Ontario provincial government adopted a bill that, if enacted, would terminate a 10-year Master Framework Agreement that was originally signed between the previous government administration and MCBC, Labatt Brewing Company Limited, Sleeman Breweries Ltd., and Brewers Retail Inc. in 2015 and governs the terms of the beer distribution and retail systems in Ontario through 2025. The government has not yet proclaimed the bill as law. The impacts of these potential legislative changes are unknown at this time, but could have a negative impact on the results of operations, cash flows and financial position of the Canada segment. While discussions remain ongoing with the government to reach a mutually agreeable alternative to the enactment of the law, the Company and the other Master Framework Agreement signatories are prepared to vigorously defend our rights and pursue legal recourse, should the Master Framework Agreement be unilaterally terminated by the enactment of the legislation.
Environmental
When we determine it is probable that a liability for environmental matters or other legal actions exists and the amount of the loss is reasonably estimable, an estimate of the future costs is recorded as a liability in the financial statements. Costs that extend the life, increase the capacity or improve the safety or efficiency of our assets or are incurred to mitigate or prevent future environmental contamination may be capitalized. Other environmental costs are expensed when incurred. Total environmental expenditures recognized for 2019, 2018 and 2017 were immaterial to our consolidated financial statements.
Canada
Our Canada brewing operations are subject to provincial environmental regulations and local permit requirements. Our Montréal, Chilliwack and Toronto breweries have water treatment facilities to pre-treat waste water before it goes to the respective local governmental facility for final treatment. We have environmental programs in Canada including organization, monitoring and verification, regulatory compliance, reporting, education and training, and corrective action.
We sold a chemical specialties business in 1996. We are still responsible for certain aspects of environmental remediation, undertaken or planned, at those chemical specialties business locations. We have established provisions for the costs of these remediation programs.
United States
We were previously notified that we are or may be a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws for the cleanup of sites where hazardous substances have allegedly been released into the environment. We cannot predict with certainty the total costs of cleanup, our share of the total cost, the extent to which contributions will be available from other parties, the amount of time necessary to complete the cleanups or insurance coverage.
Lowry
We are one of a number of entities named by the Environmental Protection Agency ("EPA") as a PRP at the Lowry Superfund site in Colorado. This landfill is owned by the City and County of Denver ("Denver") and is managed by Waste Management of Colorado, Inc. ("Waste Management"). In 1990, we recorded a pretax charge of $30 million, a portion of which was put into a trust in 1993 as part of a settlement with Denver and Waste Management regarding the then-outstanding litigation. Our settlement was based on an assumed remediation cost of $120 million (in 1992 adjusted dollars). We are obligated to pay a portion of future costs in excess of that amount.
Waste Management provides us with updated annual cost estimates through 2032. We review these cost estimates in the assessment of our accrual related to this issue. Our expected liability is based on our best estimates available.
Based on the assumptions utilized, the present value and gross amount of the costs as of December 31, 2019 are approximately $6 million and $7 million, respectively. Cost estimates were discounted using a 1.92% risk-free rate of return. We did not assume any future recoveries from insurance companies in the estimate of our liability, and none are expected.
Considering the estimates extend through the year 2032 and the related uncertainties at the site, including what additional remedial actions may be required by the EPA, new technologies and what costs we are required to cover, the estimate of our liability may change as further facts develop. We cannot predict the amount of any such change, but additional accruals in the future are possible.
Other
In prior years, we were notified by the EPA and certain state environmental divisions that we are a PRP, along with other parties, at the East Rutherford and Berry's Creek sites in New Jersey and the Chamblee site in Georgia. Certain former non-beer business operations, which we discontinued use of and subsequently sold, were involved at these sites. Potential losses associated with these sites could increase as remediation planning progresses.
We are aware of groundwater contamination at some of our properties in Colorado resulting from historical, ongoing, or nearby activities. There may also be other contamination of which we are currently unaware.
Europe and International
We are subject to the requirements of governmental and local environmental and occupational health and safety laws and regulations within each of the countries in which we operate. Compliance with these laws and regulations did not materially affect our 2019 capital expenditures, results of operations or our financial or competitive position, and we do not currently anticipate that they will do so in 2020.
19. Leases
Montreal Brewery Sale and Leaseback Transaction
In June 2019, we completed the sale of our Montreal brewery for $96.2 million (CAD 126 million), resulting in a $61.3 million gain, which was recorded as a special item. In conjunction with the sale, we agreed to lease back the existing property to continue operations on an uninterrupted basis for a period up to 5 years with early termination options at our discretion, while our new brewery in Longueuil, Quebec is being constructed. Accordingly, we have recorded operating lease right-of-use assets and liabilities of approximately CAD 6 million assuming a lease term that is coterminous with the construction of our new brewery, which is currently expected to be operational in 2021. However, due to the uncertainty inherent in our estimates, the term of the brewery lease is subject to reassessment. Once the existing property has been entirely redeveloped by the purchaser, we plan to lease a minor portion of the future space for administrative and other purposes. We have evaluated this transaction pursuant to the accounting guidance for sale and leaseback transactions and concluded that the relevant criteria have been met for full gain recognition upon completion of the transaction in the second quarter of 2019.
Lease Financial Information
For the year ended December 31, 2019, lease expense (including immaterial short-term and variable lease costs) was as follows:
| Year ended December 31, 2019 | |||
| (In millions) | |||
| Operating lease expense | $ | 71.0 | |
| Finance lease expense | 12.1 | ||
| Total lease expense | $ | 83.1 |
Separately, as a result of our decision to close our Denver, Colorado office, we recorded an impairment loss of $1.1 million to the Denver, Colorado office lease right-of use asset in the fourth quarter of 2019.
Supplemental cash flow information related to leases for the year ended December 31, 2019 was as follows:
| Year ended December 31, 2019 | |||
| (In millions) | |||
| Cash paid for amounts included in the measurements of lease liabilities: | |||
| Operating cash flows from operating leases | $ | 52.2 | |
| Operating cash flows from finance leases | $ | 3.8 | |
| Financing cash flows from finance leases | $ | 2.8 | |
| Supplemental non-cash information on right-of-use assets obtained in exchange for new lease liabilities: | |||
| Operating leases | $ | 45.6 | |
| Finance leases | $ | 9.2 |
Supplemental balance sheet information related to leases as of December 31, 2019 was as follows:
| As of | ||||
| December 31, 2019 | ||||
| Balance Sheet Classification | (In millions) | |||
| Operating Leases | ||||
| Operating lease right-of-use assets | Other assets | $ | 154.5 | |
| Current operating lease liabilities | Accounts payable and other current liabilities | $ | 46.6 | |
| Non-current operating lease liabilities | Other liabilities | 119.5 | ||
| Total operating lease liabilities | $ | 166.1 | ||
| Finance Leases | ||||
| Finance lease right-of-use assets | Properties, net | $ | 73.0 | |
| Current finance lease liabilities | Current portion of long-term debt and short-term borrowings | $ | 34.5 | |
| Non-current finance lease liabilities | Long-term debt | 60.0 | ||
| Total finance lease liabilities | $ | 94.5 |
The weighted-average remaining lease term and discount rate as of December 31, 2019 are as follows:
| Weighted-Average Remaining Lease Term (Years) | Weighted-Average Discount Rate | ||
| Operating leases | 4.5 | 4.2% | |
| Finance leases | 9.8 | 6.1% |
Based on foreign exchange rates as of December 31, 2019, maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | ||||||
| (In millions) | |||||||
| 2020 | $ | 52.2 | $ | 38.9 | |||
| 2021 | 42.2 | 6.5 | |||||
| 2022 | 32.8 | 6.5 | |||||
| 2023 | 23.0 | 6.5 | |||||
| 2024 | 11.2 | 6.5 | |||||
| Thereafter | 21.3 | 68.7 | |||||
| Total lease payments | $ | 182.7 | $ | 133.6 | |||
| Less: interest | (16.6 | ) | (39.1 | ) | |||
| Present value of lease liabilities | $ | 166.1 | $ | 94.5 |
Executed leases that have not yet commenced as of December 31, 2019 are immaterial.
Information as of December 31, 2018*, as well as comparative period information under historical lease accounting guidance*
Gross assets recorded under finance leases as of December 31, 2018 were $82.5 million. The associated accumulated amortization on these assets as of December 31, 2018 was $13.2 million. These amounts are recorded within properties, net on the consolidated balance sheet. Current and non-current finance lease liabilities as of December 31, 2018 were $3.2 million and $82.1 million, respectively, and were recorded in accounts payable and other current liabilities and other non-current liabilities, respectively, on the consolidated balance sheet. Separately, during the year ended December 31, 2018 and December 31, 2017, non-cash activities related to the recognition of finance leases was $15.5 million and $33.8 million, respectively.
Based on foreign exchange rates as of December 31, 2018, future minimum lease payments under operating leases that have initial or remaining non-cancelable terms in excess of one year, as well as finance leases, are as follows:
| Operating Leases | Finance Leases | ||||||
| Year | (In millions) | ||||||
| 2019 | $ | 49.4 | $ | 6.1 | |||
| 2020 | 40.2 | 36.2 | |||||
| 2021 | 32.6 | 5.9 | |||||
| 2022 | 24.6 | 5.9 | |||||
| 2023 | 17.0 | 5.8 | |||||
| Thereafter | 21.0 | 64.2 | |||||
| Total future minimum lease payments | $ | 184.8 | $ | 124.1 | |||
| Less: interest on finance leases | (38.8 | ) | |||||
| Present value of future minimum finance lease payments | $ | 85.3 |
Total rent expense was $66.1 million and $64.1 million in 2018 and 2017, respectively.
20. Supplemental Guarantor Information
For purposes of this Note 20, including the tables, "Parent Issuer" shall mean MCBC. "Subsidiary Guarantors" shall mean certain Canadian and U.S. subsidiaries reflecting the substantial operations of each of our Canada and U.S. segments.
SEC Registered Securities
On May 3, 2012, MCBC issued $1.9 billion of senior notes, in a registered public offering, consisting of $300 million 2.0% senior notes due 2017 (subsequently repaid in the second quarter of 2017), $500 million 3.5% senior notes due 2022, and $1.1 billion 5.0% senior notes due 2042. Additionally, on July 7, 2016, MCBC issued the $500 million 1.45% senior notes due 2019 (subsequently repaid in the third quarter of 2019), $1.0 billion 2.10% senior notes due 2021, $2.0 billion 3.0% senior notes due 2026, $1.8 billion 4.2% senior notes due 2046 and EUR $800.0 million 1.25% senior notes due 2024, in a registered public offering. In December 2017, MCBC completed an exchange offer in which it issued publicly registered senior notes in exchange for its $500 million 1.90% senior notes due 2019 (subsequently repaid in the first quarter of 2019), $500 million 2.25% senior notes due 2020 and our EUR 500 million floating rate senior notes due 2019 (subsequently repaid in the first quarter of 2019), which were issued in private placement transactions in March 2017. "Parent Issuer" in the below tables is specifically referring to MCBC in its capacity as the issuer of these 2012, 2016 and 2017 issuances. These senior notes are guaranteed on a senior unsecured basis by the Subsidiary Guarantors. Each of the Subsidiary Guarantors is 100% owned by the Parent Issuer. The guarantees are full and unconditional and joint and several.
None of our other outstanding debt is registered with the SEC, and such other outstanding debt is guaranteed on a senior unsecured basis by the Parent and/or Subsidiary Guarantors. These guarantees are full and unconditional and joint and several. See Note 11, "Debt" for details of all debt issued and outstanding as of December 31, 2019.
Presentation
In the fourth quarter of 2019, MillerCoors LLC, a subsidiary guarantor, as well as certain other subsidiary guarantors declared distributions totaling approximately $5 billion to MCBC, which were simultaneously non-cash settled via offset to an equal amount of payables that were owed by MCBC to MillerCoors LLC and the other subsidiary guarantors. Also in the fourth quarter of 2019, two subsidiary guarantors, each separately agreed to transfer certain intercompany note receivables to two separate subsidiary non-guarantors, in consideration for equity in non-cash transactions of approximately CAD 5 billion and approximately EUR 1 billion, respectively.
In the first quarter of 2018, MillerCoors LLC, a subsidiary guarantor, declared a distribution of approximately $1.7 billion to MCBC, which was simultaneously non-cash settled via offset to an equal amount of payables that were owed by MCBC to MillerCoors LLC.
The following information sets forth the condensed consolidating statements of operations for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, condensed consolidating balance sheets as of December 31, 2019 and December 31, 2018, and condensed consolidating statements of cash flows for the years ended December 31, 2019, December 31, 2018 and December 31, 2017. Investments in subsidiaries are accounted for under the equity method; accordingly, entries necessary to consolidate the Parent Issuer and all of our guarantor and non-guarantor subsidiaries are reflected in the eliminations column. In the opinion of management, separate complete financial statements of MCBC and the Subsidiary Guarantors would not provide additional material information that would be useful in assessing their financial composition.
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Sales | $ | 115.8 | $ | 9,931.2 | $ | 3,583.6 | $ | (621.5 | ) | $ | 13,009.1 | ||||||||
| Excise taxes | — | (1,356.5 | ) | (1,073.2 | ) | — | (2,429.7 | ) | |||||||||||
| Net sales | 115.8 | 8,574.7 | 2,510.4 | (621.5 | ) | 10,579.4 | |||||||||||||
| Cost of goods sold | (8.4 | ) | (5,057.6 | ) | (1,762.0 | ) | 449.8 | (6,378.2 | ) | ||||||||||
| Gross profit | 107.4 | 3,517.1 | 748.4 | (171.7 | ) | 4,201.2 | |||||||||||||
| Marketing, general and administrative expenses | (244.0 | ) | (1,994.9 | ) | (660.8 | ) | 171.7 | (2,728.0 | ) | ||||||||||
| Special items, net | (14.4 | ) | (317.1 | ) | (377.3 | ) | — | (708.8 | ) | ||||||||||
| Equity income (loss) in subsidiaries | 593.4 | (444.8 | ) | (199.1 | ) | 50.5 | — | ||||||||||||
| Operating income (loss) | 442.4 | 760.3 | (488.8 | ) | 50.5 | 764.4 | |||||||||||||
| Interest income (expense), net | (297.9 | ) | 262.1 | (236.9 | ) | — | (272.7 | ) | |||||||||||
| Other pension and postretirement benefits (costs), net | — | (25.4 | ) | 28.3 | — | 2.9 | |||||||||||||
| Other income (expense), net | (0.5 | ) | (47.5 | ) | 33.3 | — | (14.7 | ) | |||||||||||
| Total other income (expense), net | (298.4 | ) | 189.2 | (175.3 | ) | — | (284.5 | ) | |||||||||||
| Income (loss) before income taxes | 144.0 | 949.5 | (664.1 | ) | 50.5 | 479.9 | |||||||||||||
| Income tax benefit (expense) | 97.7 | (354.4 | ) | 23.0 | — | (233.7 | ) | ||||||||||||
| Net income (loss) | 241.7 | 595.1 | (641.1 | ) | 50.5 | 246.2 | |||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | — | (4.5 | ) | — | (4.5 | ) | ||||||||||||
| Net income (loss) attributable to MCBC | $ | 241.7 | $ | 595.1 | $ | (645.6 | ) | $ | 50.5 | $ | 241.7 | ||||||||
| Comprehensive income (loss) attributable to MCBC | $ | 304.3 | $ | 695.3 | $ | (608.3 | ) | $ | (87.0 | ) | $ | 304.3 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2018 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Sales | $ | 162.5 | $ | 10,118.0 | $ | 3,739.8 | $ | (682.3 | ) | $ | 13,338.0 | ||||||||
| Excise taxes | — | (1,420.3 | ) | (1,148.1 | ) | — | (2,568.4 | ) | |||||||||||
| Net sales | 162.5 | 8,697.7 | 2,591.7 | (682.3 | ) | 10,769.6 | |||||||||||||
| Cost of goods sold | (2.0 | ) | (5,242.6 | ) | (1,800.3 | ) | 460.1 | (6,584.8 | ) | ||||||||||
| Gross profit | 160.5 | 3,455.1 | 791.4 | (222.2 | ) | 4,184.8 | |||||||||||||
| Marketing, general and administrative expenses | (305.5 | ) | (2,041.0 | ) | (678.4 | ) | 222.2 | (2,802.7 | ) | ||||||||||
| Special items, net | (1.7 | ) | 270.6 | (19.2 | ) | — | 249.7 | ||||||||||||
| Equity income (loss) in subsidiaries | 1,367.8 | (126.5 | ) | 131.4 | (1,372.7 | ) | — | ||||||||||||
| Operating income (loss) | 1,221.1 | 1,558.2 | 225.2 | (1,372.7 | ) | 1,631.8 | |||||||||||||
| Other income (expense), net | |||||||||||||||||||
| Interest income (expense), net | (323.2 | ) | 342.7 | (317.7 | ) | — | (298.2 | ) | |||||||||||
| Other pension and postretirement benefits (costs), net | (0.1 | ) | 5.4 | 32.9 | — | 38.2 | |||||||||||||
| Other income (expense), net | (0.1 | ) | (57.3 | ) | 45.4 | — | (12.0 | ) | |||||||||||
| Total other income (expense), net | (323.4 | ) | 290.8 | (239.4 | ) | — | (272.0 | ) | |||||||||||
| Income (loss) before income taxes | 897.7 | 1,849.0 | (14.2 | ) | (1,372.7 | ) | 1,359.8 | ||||||||||||
| Income tax benefit (expense) | 218.8 | (480.8 | ) | 36.8 | — | (225.2 | ) | ||||||||||||
| Net income (loss) | 1,116.5 | 1,368.2 | 22.6 | (1,372.7 | ) | 1,134.6 | |||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | — | (18.1 | ) | — | (18.1 | ) | ||||||||||||
| Net income (loss) attributable to MCBC | $ | 1,116.5 | $ | 1,368.2 | $ | 4.5 | $ | (1,372.7 | ) | $ | 1,116.5 | ||||||||
| Comprehensive income (loss) attributable to MCBC | $ | 826.5 | $ | 1,061.9 | $ | (122.8 | ) | $ | (939.1 | ) | $ | 826.5 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2017 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Sales | $ | 21.8 | $ | 10,457.9 | $ | 3,513.7 | $ | (521.9 | ) | $ | 13,471.5 | ||||||||
| Excise taxes | — | (1,475.1 | ) | (993.6 | ) | — | (2,468.7 | ) | |||||||||||
| Net sales | 21.8 | 8,982.8 | 2,520.1 | (521.9 | ) | 11,002.8 | |||||||||||||
| Cost of goods sold | (2.0 | ) | (5,020.3 | ) | (1,701.4 | ) | 487.0 | (6,236.7 | ) | ||||||||||
| Gross profit | 19.8 | 3,962.5 | 818.7 | (34.9 | ) | 4,766.1 | |||||||||||||
| Marketing, general and administrative expenses | (284.8 | ) | (2,165.8 | ) | (636.3 | ) | 34.9 | (3,052.0 | ) | ||||||||||
| Special items, net | (0.8 | ) | (29.8 | ) | (5.8 | ) | — | (36.4 | ) | ||||||||||
| Equity income (loss) in subsidiaries | 2,001.8 | (285.7 | ) | 193.4 | (1,909.5 | ) | — | ||||||||||||
| Operating income (loss) | 1,736.0 | 1,481.2 | 370.0 | (1,909.5 | ) | 1,677.7 | |||||||||||||
| Other income (expense), net | |||||||||||||||||||
| Interest income (expense), net | (308.4 | ) | 275.6 | (310.5 | ) | — | (343.3 | ) | |||||||||||
| Other pension and postretirement benefits (costs), net | — | 1.3 | 46.1 | — | 47.4 | ||||||||||||||
| Other income (expense), net | (8.5 | ) | 178.9 | (169.0 | ) | — | 1.4 | ||||||||||||
| Total other income (expense), net | (316.9 | ) | 455.8 | (433.4 | ) | — | (294.5 | ) | |||||||||||
| Income (loss) before income taxes | 1,419.1 | 1,937.0 | (63.4 | ) | (1,909.5 | ) | 1,383.2 | ||||||||||||
| Income tax benefit (expense) | 146.5 | 64.8 | (6.7 | ) | — | 204.6 | |||||||||||||
| Net income (loss) | 1,565.6 | 2,001.8 | (70.1 | ) | (1,909.5 | ) | 1,587.8 | ||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | — | (22.2 | ) | — | (22.2 | ) | ||||||||||||
| Net income (loss) attributable to MCBC | $ | 1,565.6 | $ | 2,001.8 | $ | (92.3 | ) | $ | (1,909.5 | ) | $ | 1,565.6 | |||||||
| Comprehensive income (loss) attributable to MCBC | $ | 2,277.4 | $ | 2,785.8 | $ | 376.8 | $ | (3,162.6 | ) | $ | 2,277.4 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
| As of | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Assets | |||||||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 15.7 | $ | 119.6 | $ | 388.1 | $ | — | $ | 523.4 | |||||||||
| Accounts receivable, net | — | 396.3 | 318.5 | — | 714.8 | ||||||||||||||
| Other receivables, net | 14.4 | 58.4 | 32.7 | — | 105.5 | ||||||||||||||
| Inventories, net | — | 449.1 | 166.8 | — | 615.9 | ||||||||||||||
| Other current assets, net | 3.0 | 126.0 | 95.8 | — | 224.8 | ||||||||||||||
| Intercompany accounts receivable | 94.1 | 190.0 | 14.9 | (299.0 | ) | — | |||||||||||||
| Total current assets | 127.2 | 1,339.4 | 1,016.8 | (299.0 | ) | 2,184.4 | |||||||||||||
| Properties, net | 19.8 | 3,294.7 | 1,232.0 | — | 4,546.5 | ||||||||||||||
| Goodwill | — | 6,146.5 | 1,484.9 | — | 7,631.4 | ||||||||||||||
| Other intangibles, net | 4.0 | 11,750.6 | 1,901.4 | — | 13,656.0 | ||||||||||||||
| Net investment in and advances to subsidiaries | 21,200.6 | 8,364.9 | 4,497.9 | (34,063.4 | ) | — | |||||||||||||
| Other assets | 137.2 | 364.4 | 417.9 | (78.0 | ) | 841.5 | |||||||||||||
| Total assets | $ | 21,488.8 | $ | 31,260.5 | $ | 10,550.9 | $ | (34,440.4 | ) | $ | 28,859.8 | ||||||||
| Liabilities and equity | |||||||||||||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable and other current liabilities | $ | 170.7 | $ | 1,722.0 | $ | 874.6 | $ | — | $ | 2,767.3 | |||||||||
| Current portion of long-term debt and short-term borrowings | 499.7 | 415.1 | 13.4 | — | 928.2 | ||||||||||||||
| Intercompany accounts payable | — | 150.7 | 148.3 | (299.0 | ) | — | |||||||||||||
| Total current liabilities | 670.4 | 2,287.8 | 1,036.3 | (299.0 | ) | 3,695.5 | |||||||||||||
| Long-term debt | 7,250.3 | 779.1 | 80.1 | — | 8,109.5 | ||||||||||||||
| Pension and postretirement benefits | 7.2 | 695.5 | 13.9 | — | 716.6 | ||||||||||||||
| Deferred tax liabilities | — | 1,593.3 | 743.3 | (78.0 | ) | 2,258.6 | |||||||||||||
| Other liabilities | 142.6 | 172.2 | 91.7 | — | 406.5 | ||||||||||||||
| Intercompany notes payable | — | — | 65.0 | (65.0 | ) | — | |||||||||||||
| Total liabilities | 8,070.5 | 5,527.9 | 2,030.3 | (442.0 | ) | 15,186.7 | |||||||||||||
| MCBC stockholders' equity | 13,419.4 | 25,796.5 | 8,266.9 | (34,063.4 | ) | 13,419.4 | |||||||||||||
| Intercompany notes receivable | (1.1 | ) | (63.9 | ) | — | 65.0 | — | ||||||||||||
| Total stockholders' equity | 13,418.3 | 25,732.6 | 8,266.9 | (33,998.4 | ) | 13,419.4 | |||||||||||||
| Noncontrolling interests | — | — | 253.7 | — | 253.7 | ||||||||||||||
| Total equity | 13,418.3 | 25,732.6 | 8,520.6 | (33,998.4 | ) | 13,673.1 | |||||||||||||
| Total liabilities and equity | $ | 21,488.8 | $ | 31,260.5 | $ | 10,550.9 | $ | (34,440.4 | ) | $ | 28,859.8 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
| As of | |||||||||||||||||||
| December 31, 2018 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Assets | |||||||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 515.8 | $ | 156.1 | $ | 386.0 | $ | — | $ | 1,057.9 | |||||||||
| Accounts receivable, net | — | 427.3 | 317.1 | — | 744.4 | ||||||||||||||
| Other receivables, net | 50.0 | 48.3 | 28.3 | — | 126.6 | ||||||||||||||
| Inventories, net | — | 451.6 | 140.2 | — | 591.8 | ||||||||||||||
| Other current assets, net | 3.0 | 157.2 | 85.4 | — | 245.6 | ||||||||||||||
| Intercompany accounts receivable | — | 2,366.0 | 31.0 | (2,397.0 | ) | — | |||||||||||||
| Total current assets | 568.8 | 3,606.5 | 988.0 | (2,397.0 | ) | 2,766.3 | |||||||||||||
| Properties, net | 19.0 | 3,427.5 | 1,161.8 | — | 4,608.3 | ||||||||||||||
| Goodwill | — | 6,444.0 | 1,816.8 | — | 8,260.8 | ||||||||||||||
| Other intangibles, net | 6.0 | 11,800.0 | 1,970.4 | — | 13,776.4 | ||||||||||||||
| Net investment in and advances to subsidiaries | 25,475.0 | 3,893.2 | 4,579.7 | (33,947.9 | ) | — | |||||||||||||
| Other assets | 159.9 | 193.2 | 436.0 | (91.1 | ) | 698.0 | |||||||||||||
| Total assets | $ | 26,228.7 | $ | 29,364.4 | $ | 10,952.7 | $ | (36,436.0 | ) | $ | 30,109.8 | ||||||||
| Liabilities and equity | |||||||||||||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable and other current liabilities | $ | 170.8 | $ | 1,651.0 | $ | 884.6 | $ | — | $ | 2,706.4 | |||||||||
| Current portion of long-term debt and short-term borrowings | 1,572.6 | — | 21.9 | — | 1,594.5 | ||||||||||||||
| Intercompany accounts payable | 1,836.5 | 120.9 | 439.6 | (2,397.0 | ) | — | |||||||||||||
| Total current liabilities | 3,579.9 | 1,771.9 | 1,346.1 | (2,397.0 | ) | 4,300.9 | |||||||||||||
| Long-term debt | 7,765.6 | 1,097.4 | 30.8 | — | 8,893.8 | ||||||||||||||
| Pension and postretirement benefits | 3.2 | 711.2 | 12.2 | — | 726.6 | ||||||||||||||
| Deferred tax liabilities | — | 1,461.1 | 758.9 | (91.1 | ) | 2,128.9 | |||||||||||||
| Other liabilities | 26.0 | 199.3 | 98.5 | — | 323.8 | ||||||||||||||
| Intercompany notes payable | 1,347.6 | 63.6 | 5,998.6 | (7,409.8 | ) | — | |||||||||||||
| Total liabilities | 12,722.3 | 5,304.5 | 8,245.1 | (9,897.9 | ) | 16,374.0 | |||||||||||||
| MCBC stockholders' equity | 13,507.4 | 30,057.5 | 3,890.4 | (33,947.9 | ) | 13,507.4 | |||||||||||||
| Intercompany notes receivable | (1.0 | ) | (5,997.6 | ) | (1,411.2 | ) | 7,409.8 | — | |||||||||||
| Total stockholders' equity | 13,506.4 | 24,059.9 | 2,479.2 | (26,538.1 | ) | 13,507.4 | |||||||||||||
| Noncontrolling interests | — | — | 228.4 | — | 228.4 | ||||||||||||||
| Total equity | 13,506.4 | 24,059.9 | 2,707.6 | (26,538.1 | ) | 13,735.8 | |||||||||||||
| Total liabilities and equity | $ | 26,228.7 | $ | 29,364.4 | $ | 10,952.7 | $ | (36,436.0 | ) | $ | 30,109.8 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 1,328.1 | $ | 494.9 | $ | 279.8 | $ | (205.5 | ) | $ | 1,897.3 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||
| Additions to properties | (9.3 | ) | (354.9 | ) | (229.6 | ) | — | (593.8 | ) | ||||||||||
| Proceeds from sales of properties and other assets | — | 110.3 | 5.6 | — | 115.9 | ||||||||||||||
| Other | 46.2 | (4.5 | ) | 2.9 | — | 44.6 | |||||||||||||
| Net intercompany investing activity | 89.9 | 84.9 | 65.2 | (240.0 | ) | — | |||||||||||||
| Net cash provided by (used in) investing activities | 126.8 | (164.2 | ) | (155.9 | ) | (240.0 | ) | (433.3 | ) | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||
| Exercise of stock options under equity compensation plans | 1.6 | — | — | — | 1.6 | ||||||||||||||
| Dividends paid | (389.6 | ) | (205.5 | ) | (34.8 | ) | 205.5 | (424.4 | ) | ||||||||||
| Payments on debt and borrowings | (1,566.3 | ) | (0.9 | ) | (19.0 | ) | — | (1,586.2 | ) | ||||||||||
| Proceeds on debt and borrowings | — | — | 3.0 | — | 3.0 | ||||||||||||||
| Net proceeds from (payments on) revolving credit facilities and commercial paper | — | — | (4.7 | ) | — | (4.7 | ) | ||||||||||||
| Other | (3.8 | ) | (9.8 | ) | 17.3 | — | 3.7 | ||||||||||||
| Net intercompany financing activity | — | (156.2 | ) | (83.8 | ) | 240.0 | — | ||||||||||||
| Net cash provided by (used in) financing activities | (1,958.1 | ) | (372.4 | ) | (122.0 | ) | 445.5 | (2,007.0 | ) | ||||||||||
| CASH AND CASH EQUIVALENTS: | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (503.2 | ) | (41.7 | ) | 1.9 | — | (543.0 | ) | |||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 3.1 | 5.2 | 0.2 | — | 8.5 | ||||||||||||||
| Balance at beginning of year | 515.8 | 156.1 | 386.0 | — | 1,057.9 | ||||||||||||||
| Balance at end of period | $ | 15.7 | $ | 119.6 | $ | 388.1 | $ | — | $ | 523.4 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2018 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 1,199.8 | $ | 1,044.6 | $ | 331.7 | $ | (244.8 | ) | $ | 2,331.3 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||
| Additions to properties | (11.1 | ) | (440.5 | ) | (200.1 | ) | — | (651.7 | ) | ||||||||||
| Proceeds from sales of properties and other assets | — | 23.4 | 9.1 | — | 32.5 | ||||||||||||||
| Other | — | (0.6 | ) | (49.3 | ) | — | (49.9 | ) | |||||||||||
| Net intercompany investing activity | 46.3 | (35.4 | ) | 176.4 | (187.3 | ) | — | ||||||||||||
| Net cash provided by (used in) investing activities | 35.2 | (453.1 | ) | (63.9 | ) | (187.3 | ) | (669.1 | ) | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||
| Exercise of stock options under equity compensation plans | 16.0 | — | — | — | 16.0 | ||||||||||||||
| Dividends paid | (325.2 | ) | (56.4 | ) | (217.4 | ) | 244.8 | (354.2 | ) | ||||||||||
| Payments on debt and borrowings | — | (307.3 | ) | (12.5 | ) | — | (319.8 | ) | |||||||||||
| Debt issuance costs | (0.5 | ) | — | — | — | (0.5 | ) | ||||||||||||
| Net proceeds from (payments on) revolving credit facilities and commercial paper | (378.4 | ) | — | 4.1 | — | (374.3 | ) | ||||||||||||
| Other | (5.1 | ) | (8.5 | ) | 37.5 | — | 23.9 | ||||||||||||
| Net intercompany financing activity | (32.6 | ) | (199.9 | ) | 45.2 | 187.3 | — | ||||||||||||
| Net cash provided by (used in) financing activities | (725.8 | ) | (572.1 | ) | (143.1 | ) | 432.1 | (1,008.9 | ) | ||||||||||
| CASH AND CASH EQUIVALENTS: | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 509.2 | 19.4 | 124.7 | — | 653.3 | ||||||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | — | (4.2 | ) | (9.8 | ) | — | (14.0 | ) | |||||||||||
| Balance at beginning of year | 6.6 | 140.9 | 271.1 | — | 418.6 | ||||||||||||||
| Balance at end of period | $ | 515.8 | $ | 156.1 | $ | 386.0 | $ | — | $ | 1,057.9 |
MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
| Year ended | |||||||||||||||||||
| December 31, 2017 | |||||||||||||||||||
| Parent Issuer | Subsidiary Guarantors | Subsidiary Non Guarantors | Eliminations | Consolidated | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 792.5 | $ | 1,474.7 | $ | 818.5 | $ | (1,219.4 | ) | $ | 1,866.3 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||
| Additions to properties | (12.1 | ) | (428.6 | ) | (158.9 | ) | — | (599.6 | ) | ||||||||||
| Proceeds from sales of properties and other assets | — | 4.4 | 56.1 | — | 60.5 | ||||||||||||||
| Other | — | 0.4 | 0.5 | — | 0.9 | ||||||||||||||
| Net intercompany investing activity | 72.1 | 21.1 | (254.4 | ) | 161.2 | — | |||||||||||||
| Net cash provided by (used in) investing activities | 60.0 | (402.7 | ) | (356.7 | ) | 161.2 | (538.2 | ) | |||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||
| Exercise of stock options under equity compensation plans | 4.0 | — | — | — | 4.0 | ||||||||||||||
| Dividends paid | (324.0 | ) | (809.5 | ) | (439.3 | ) | 1,219.4 | (353.4 | ) | ||||||||||
| Payments on debt and borrowings | (2,600.0 | ) | (398.4 | ) | (1.7 | ) | — | (3,000.1 | ) | ||||||||||
| Proceeds on debt and borrowings | 1,536.0 | — | — | — | 1,536.0 | ||||||||||||||
| Debt issuance costs | (7.0 | ) | — | — | — | (7.0 | ) | ||||||||||||
| Net proceeds from (payments on) revolving credit facilities and commercial paper | 378.5 | — | (4.2 | ) | — | 374.3 | |||||||||||||
| Other | (12.9 | ) | (11.1 | ) | (26.2 | ) | — | (50.2 | ) | ||||||||||
| Net intercompany financing activity | 32.2 | 149.1 | (20.1 | ) | (161.2 | ) | — | ||||||||||||
| Net cash provided by (used in) financing activities | (993.2 | ) | (1,069.9 | ) | (491.5 | ) | 1,058.2 | (1,496.4 | ) | ||||||||||
| CASH AND CASH EQUIVALENTS: | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (140.7 | ) | 2.1 | (29.7 | ) | — | (168.3 | ) | |||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | — | (2.7 | ) | 28.7 | — | 26.0 | |||||||||||||
| Balance at beginning of year | 147.3 | 141.5 | 272.1 | — | 560.9 | ||||||||||||||
| Balance at end of period | $ | 6.6 | $ | 140.9 | $ | 271.1 | $ | — | $ | 418.6 |
21. Quarterly Financial Information (Unaudited)
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| (In millions, except per share data) | |||||||||||||||||||||||||||||||
| Sales | $ | 2,800.1 | $ | 2,868.0 | $ | 3,620.0 | $ | 3,820.5 | $ | 3,498.0 | $ | 3,625.1 | $ | 3,091.0 | $ | 3,024.4 | |||||||||||||||
| Excise taxes | (496.8 | ) | (536.5 | ) | (671.7 | ) | (735.3 | ) | (656.4 | ) | (690.9 | ) | (604.8 | ) | (605.7 | ) | |||||||||||||||
| Net sales | 2,303.3 | 2,331.5 | 2,948.3 | 3,085.2 | 2,841.6 | 2,934.2 | 2,486.2 | 2,418.7 | |||||||||||||||||||||||
| Cost of goods sold | (1,413.0 | ) | (1,535.7 | ) | (1,759.8 | ) | (1,739.1 | ) | (1,685.4 | ) | (1,714.0 | ) | (1,520.0 | ) | (1,596.0 | ) | |||||||||||||||
| Gross profit | $ | 890.3 | $ | 795.8 | $ | 1,188.5 | $ | 1,346.1 | $ | 1,156.2 | $ | 1,220.2 | $ | 966.2 | $ | 822.7 | |||||||||||||||
| Amounts attributable to Molson Coors Beverage Company: | |||||||||||||||||||||||||||||||
| Net income (loss) attributable to Molson Coors Beverage Company | $ | 151.4 | $ | 278.1 | $ | 329.4 | $ | 424.1 | $ | (402.8 | ) | $ | 338.3 | $ | 163.7 | $ | 76.0 | ||||||||||||||
| Basic net income (loss) attributable to Molson Coors Beverage Company per share | $ | 0.70 | $ | 1.29 | $ | 1.52 | $ | 1.96 | $ | (1.86 | ) | $ | 1.57 | $ | 0.76 | $ | 0.35 | ||||||||||||||
| Diluted net income (loss) attributable to Molson Coors Beverage Company per share | $ | 0.70 | $ | 1.28 | $ | 1.52 | $ | 1.96 | $ | (1.86 | ) | $ | 1.56 | $ | 0.75 | $ | 0.35 |
The sum of the quarterly net income per share amounts may not agree to the full-year net income per share amounts. We calculate net income per share based on the weighted-average number of outstanding shares during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full-year result that does not agree to the sum of the individual quarters. Additionally, due to the anti-dilutive effect resulting from the reported net loss attributable to MCBC for the three months ended September 30, 2019, the impact of potentially dilutive securities has been excluded from the quarterly calculation of weighted-average shares for diluted EPS for the third quarter of 2019.
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