ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For more than two centuries, we have been brewing beverages that unite people for all life’s moments. From Coors Light, Miller Lite, Molson Canadian, Carling, and Staropramen to Coors Banquet, Blue Moon Belgian White, Blue Moon LightSky, Vizzy, Coors Seltzer, Leinenkugel’s Summer Shandy, Creemore Springs, Hop Valley and more, we produce many beloved and iconic beer brands. While our Company’s history is rooted in beer, we offer a modern portfolio that expands beyond the beer aisle as well. As a business, our ambition is to be the first choice for our people, our consumers and our customers, and our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") in this Annual Report on Form 10-K is provided to assist in understanding our Company, operations and current business environment and should be considered a supplement to, and read in conjunction with, the accompanying audited consolidated financial statements and notes included within Part II—Item 8 Financial Statements and Supplementary Data, as well as the discussion of our business and related risk factors in Part I—Item 1 Business and Part I—Item 1A Risk Factors, respectively. See also "Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995."
A discussion related to the results of operations and changes in financial condition for 2020 compared to 2019 has been omitted from this report, but may be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 Form 10-K, filed with the SEC on February 11, 2021, which is available free of charge on the SEC's website at www.sec.gov and our corporate website at www.molsoncoors.com.
Our Fiscal Year
Unless otherwise indicated, (a) all $ amounts are in USD, (b) comparisons are to comparable prior periods and (c) 2021, 2020 and 2019 refers to the 12 months ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
Operational Measures
We have certain operational measures, such as STWs and STRs, which we believe are important metrics. STW is a metric that we use in our business to reflect the sales from our operations to our direct customers, generally wholesalers. We believe the STW metric is important because it gives an indication of the amount of beer and adjacent products that we have produced and shipped to customers. STR is a metric that we use in our business to refer to sales closer to the end consumer than STWs, which generally means sales from wholesalers or our company to retailers, who in turn sell to consumers. We believe the STR metric is important because, unlike STWs, it provides the closest indication of the performance of our brands in relation to market and competitor sales trends.
Items Affecting Reported Results
Items Affecting Consolidated Results of Operations
Cybersecurity Incident
During March 2021, we experienced a systems outage that was caused by a cybersecurity incident. We engaged leading forensic information technology firms and legal counsel to assist our investigation into the incident and we restored our systems after working to get the systems back up as quickly as possible. Despite these actions, we experienced delays and disruptions to our business, including brewery operations, production and shipments. This incident caused us to not produce or ship as much as we otherwise would have in the first quarter of 2021. Subsequently, in the balance of 2021, we made progress recovering from the incident with increased shipments and have operationally recovered as of December 31, 2021. In addition, we incurred certain incremental one-time costs of $2.4 million for the year ended December 31, 2021 related to consultants, experts and data recovery efforts, net of insurance recoveries.
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Coronavirus Global Pandemic
We have been actively monitoring the impact of the coronavirus pandemic which has had a material adverse effect on our operations, liquidity, financial condition and results of operations in 2020 and 2021. In 2021, while we saw improvements in the marketplace related to the coronavirus global pandemic as on-premise locations began to re-open across the world, including in the U.S. and Europe, which led to a shift in revenue from off-premise to on-premise starting in the second quarter and continuing through the third quarter of 2021, during the fourth quarter of 2021, a new variant of coronavirus, Omicron, created additional uncertainty and negatively impacted our on-premise business. While on-premise volumes in our EMEA&APAC segment progressively improved throughout 2021 as bars and restaurants reopened with restrictions, due to implications of the new coronavirus variant, consumer behavior in the U.K. and across Central Europe became more uncertain as individuals were encouraged to work from home and reduce other personal interactions during the fourth quarter of 2021. With a shift in consumer behavior and surge in coronavirus cases not only in Europe but also in the U.S. and Canada at the end of the year, sales to the on-premise during the fourth quarter of 2021 were negatively impacted. The extent to which our operations will continue to be impacted by the coronavirus pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the level of governmental or societal orders or restrictions on public gatherings and on-premise venues, including any vaccine mandates or testing requirements, the severity and duration of the coronavirus pandemic by market, including continued or prolonged outbreaks of variants, changes in consumer behavior, the rate of vaccination and the efficacy of vaccines against the coronavirus and related variants. We continue to actively monitor the ongoing evolution of the coronavirus pandemic and resulting impacts to our business.
Despite the improvements in re-openings of on-premise locations from 2020, closures and openings with restrictions continued to impact our financial results during 2021. Specifically, beginning in the first quarter of 2020 and continuing into the first half of 2021, we experienced a significant decline in on-premise demand in the Americas and EMEA&APAC segments resulting from lockdowns and other government-imposed restrictions to the on-premise. See further discussion in Part I. Item 1. Business regarding the historical percentage of on-premise channel versus off-premise within our Americas and EMEA&APAC segments and resulting implications to expected profitability as a result of the effective closures of the on-premise in the markets in which we operate. While certain countries in Europe lifted lockdown restrictions, particularly in the U.K. which resulted in the reopening of certain on-premise locations early in the second quarter of 2021 with measures removed early in the third quarter of 2021, the on-premise did not return to pre-pandemic levels in the EMEA&APAC segment. In addition, during the first half of 2021, certain provinces of Canada, including the most populous provinces, endured lockdowns pursuant to which bars and restaurants were required to close. During the third quarter of 2021, these venues began to reopen with varying degrees of restrictions; however, during the fourth quarter of 2021 as a result of implications from the new coronavirus variant, restrictions in certain provinces were implemented and consumer behavior in the on-premise became more uncertain and as a result sales to the on-premise channel in the fourth quarter of 2021 were negatively impacted. Throughout 2021, the U.S. progressively reopened, and sales to restaurants and bars returned to near pre-coronavirus pandemic levels within the Americas segment but pulled back towards the end of the year as a result of the spread of the Omicron coronavirus variant. Certain sporting events, festivals and other large public gatherings where our products are served have started to return with restrictions including proof of vaccination or negative coronavirus testing requirements. While the U.S., Canada, and Western European countries have seen an increase in vaccination levels throughout 2021, certain Eastern European countries have lagged, and therefore, the risk of further coronavirus pandemic restrictions and governmental imposed lockdowns remains throughout Europe. Throughout the world, any governmental or societal impositions of restrictions on public gatherings, especially if prolonged in nature, will continue to impact on-premise traffic and, in turn, our business.
In addition, where we have seen shifts in demand to the off-premise, and shifts back to the on-premise and the related shifts between certain package types, this has strained our supply chain and package availability, requiring that we strategically prioritize certain brands and package types and expand the number of suppliers we work with to ensure we can meet production requirements. Our supply chain continues to work diligently to ensure sufficient supply of these high-demand brand and packages as we adjust to these changing consumer dynamics.
Further, during 2020, we recorded charges of $15.5 million within cost of goods sold related to temporary "thank you" pay for certain essential Americas segment brewery employees. Additionally, in order to support and demonstrate our commitment to the continued viability of the many bars and restaurants which were negatively impacted by the coronavirus pandemic, during the first quarter of 2020, we initiated temporary keg relief programs in many of our markets. We committed to provide customers with reimbursements for untapped kegs that met certain established return requirements in conjunction with the voluntary programs. As a result, during 2020, we recognized a reduction to net sales of $30.3 million ($13.2 million for the Americas segment and $17.1 million for the EMEA&APAC segment) for reimbursements through these keg relief programs, substantially all of which was recognized in the first quarter of 2020 other than immaterial adjustments for changes in estimates during the remainder of 2020, reflecting estimated sales returns and reimbursements through these keg relief programs.
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Further, during 2020, we recognized charges of $12.1 million ($9.2 million for the Americas segment and $2.9 million for the EMEA&APAC segment), substantially all of which were recognized in the first quarter of 2020 other than immaterial adjustments for changes in estimates during the remainder of 2020, within cost of goods sold related to obsolete finished goods keg inventories that were not expected to be sold within our freshness specifications, as well as the estimated costs to facilitate the above mentioned keg returns. See Part II—Item 8 Financial Statements and Supplementary Data, Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for additional details.
As a result of the ongoing impacts of the coronavirus pandemic, we continue to take various mitigating actions to offset some of the implications to our employees and communities, as well as the challenges to performance, while also ensuring liquidity and deleveraging remain key priorities. We continue to monitor the coronavirus pandemic and will take additional actions as necessary if the global coronavirus pandemic takes a further negative turn. Such potential actions may include, but are not limited to, drawing on our revolving line of credit facility, issuing additional commercial paper under our U.S. commercial paper program (see Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt" for further discussion of the facilities and our remaining capacity), further accessing the capital markets, reducing discretionary spending including capital expenditures and asset monetization.
In response to the global economic uncertainty created by the coronavirus pandemic, our board of directors suspended our regular quarterly dividends on our Class A and Class B common and exchangeable shares in May 2020. In the third quarter of 2021, a quarterly dividend was reinstated. See "Liquidity and Capital Resources" and Item 1A. "Risk Factors" in this report for additional information regarding the impact of the global coronavirus pandemic on our liquidity. We also continue to monitor the impacts of the coronavirus pandemic on the recoverability of our assets, including goodwill and indefinite-lived intangible assets. Given the length and severity of the impacts of the global coronavirus pandemic on our EMEA&APAC segment, as well as the protracted recovery expected in certain on-premise markets, we recorded a goodwill impairment loss of $1,484.3 million in the fourth quarter of 2020. If the duration of the coronavirus pandemic is further prolonged and the severity of its impact continues or worsens, it could result in additional significant impairment losses. See Part II—Item 8 Financial Statements and Supplementary Data, Note 10, "Goodwill andIntangibleAssets" 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 growth. The revitalization plan established Chicago, Illinois as our Americas segment operational headquarters. We closed our office in Denver, Colorado and consolidated certain administrative functions into our other existing office locations. As of January 1, 2020, we changed our name to Molson Coors Beverage Company and changed our management structure to two segments - Americas and EMEA&APAC. We began to incur charges related to these restructuring activities during the fourth quarter of 2019 and we recognized severance and retention charges of $4.0 million, $35.6 million and $41.2 million during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. As of the year ended December 31, 2021, the revitalization plan restructuring charges were substantially complete.
See Part II—Item 8 Financial Statements and Supplementary Data Note 7, "Special Items" and Note 10, "Goodwill and Intangibles" for further discussion of the impacts of this plan.
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Cost Inflation
We are experiencing cost inflation, including higher transportation and input costs which negatively impacted our results of operations during the year ended December 31, 2021. We expect cost inflation to continue to have a negative impact in 2022. Higher transportation costs are a result of increased fuel prices, a short supply of truck drivers worldwide and increased freight costs. Driver shortages are forcing us to use the spot market and to pay spot market prices which are higher than they have been in many years. We are taking steps to reduce the impact of driver shortages by shipping more beverages via rail. Besides impacting our outbound shipments, our suppliers are facing difficulty in timely delivering the materials we need, and we are also experiencing increased supply costs due to overall cost inflation. The volatility of aluminum prices, inclusive of Midwest Premium and tariffs, continued to significantly impact our results during the year ended December 31, 2021. To the extent these prices continue to fluctuate, our business and financial results could be materially adversely impacted. We continue to monitor these risks and rely on our risk management hedging program, pricing, our premiumization strategy and cost savings programs to help mitigate some of the inflationary pressure.
Items Affecting Americas Segment Results of Operations
Texas Storm
In February 2021, a winter ice storm severely impacted the southern U.S. In particular, local government authorities in Texas were forced to impose energy restrictions, causing the Fort Worth brewery to be offline which resulted in our inability to produce or ship product during the downtime.
Irwindale, California Brewery Sale
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, granting Pabst an option to purchase our Irwindale, California brewery, including plant equipment and machinery and the underlying land for $150 million, subject to adjustment as further specified in the option agreement. Pursuant to the option agreement, on May 4, 2020, Pabst exercised its option to purchase the Irwindale brewery and the purchase was completed in the fourth quarter of 2020. Production at the Irwindale brewery ceased during the third quarter of 2020. We recorded special items charges related to the Irwindale brewery closure as further discussed in Part II—Item 8 Financial Statements and Supplementary Data Note 7, "Special Items".
Montreal Brewery Sale
In further efforts to optimize the Canada and U.S. brewery network, in the third quarter of 2017, we announced a plan to build a more efficient and flexible brewery in Longueuil, Québec. During the second quarter of 2019, we completed the sale of our Montreal brewery for $96.2 million, resulting in a $61.3 million gain, which was recorded as special items, net in the consolidated statement of operations. In conjunction with the sale, we agreed to lease back the existing property to continue operations on an uninterrupted basis until the new brewery became operational. Completion of the Longueuil, Québec brewery occurred during the fourth quarter of 2021.
Items Affecting EMEA&APAC Segment Results of Operations
Fiscal Year 2020 Goodwill Impairment
In fiscal year 2020, we recorded a goodwill impairment charge related to our EMEA&APAC reporting unit of $1,484.3 million as a result of the annual goodwill impairment analysis. Consequently, the EMEA&APAC reporting unit was fully impaired as of December 31, 2020. See Part II—Item 8 Financial Statements and Supplementary Data, Note 10, "Goodwill and Intangible Assets" for additional information.
Impairment of a Disposal Group
During the third quarter of 2020, we recognized an impairment loss of $30.0 million recorded within special items, net related to the held for sale classification of a disposal group within our India business, representing an insignificant part of our EMEA&APAC segment. The sale of the India business disposal group was completed during the first quarter of 2021. During the fourth quarter of 2021, we recognized an impairment loss of $13.5 million within special items, net related to the held for sale classification of the remaining portion of our India business.
Consolidated Results of Operations
The following table highlights summarized components of our consolidated statements of operations for the years ended December 31, 2021, December 31, 2020 and December 31, 2019. See Part II—Item 8 Financial Statements and Supplementary Data, “Consolidated Statements of Operations” for additional details of our U.S. GAAP results comparing December 31, 2021 and December 31, 2020.
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For the years ended
(In millions, except percentages and per share data)
Net income (loss) attributable to MCBC $ 1,005.7 N/M $ (949.0) N/M $ 241.7
N/M = Not meaningful
Foreign currency impacts on results
During 2021, foreign currency movements favorably impacted our consolidated USD income before income taxes by $4.5 million (favorably impacting income before income taxes of our Americas segment by $2.1 million, our EMEA&APAC segment by $0.3 million and unallocated by $2.1 million). Included in this amount are both translational and transactional impacts of changes in foreign exchange rates. The impact of transactional foreign currency gains and losses is recorded within other income (expense) in our consolidated statements of operations.
Volume
Worldwide brand volume (or "brand volume" when discussed by segment) reflects owned or actively managed brands sold to unrelated external customers within our geographic markets (net of returns and allowances), royalty volume and our proportionate share of equity investment worldwide brand volume calculated consistently with MCBC owned volume. Financial volume represents owned brands sold to unrelated external customers within our geographical markets, net of returns and allowances as well as contract brewing, wholesale non-owned brand volume and company-owned distribution volume. Contract brewing and wholesaler volume is included within financial volume, but is removed from worldwide brand volume, as this is non-owned volume for which we do not directly control performance. Royalty volume consists of our brands produced and sold by third parties under various license and contract-brewing agreements and because this is owned volume, it is included in worldwide brand volume. Our worldwide brand volume definition also includes an adjustment from Sales-to-Wholesaler (STW) volume to Sales-to-Retailer (STR) volume. We believe the brand volume metric is useful to investors and management because, unlike financial volume and STWs, it provides the closest indication of the performance of our brands in relation to market and competitor sales trends.
As part of the revitalization plan strategy to grow our above premium portfolio and expand beyond the beer aisle, we have de-prioritized certain non-core economy SKUs. This strategy is intended to drive sustainable net sales growth and earnings growth, despite potential volume declines as the portfolio mix shifts towards a higher composition of above premium products.
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For the years ended
(In millions, except percentages)
Volume in hectoliters
N/M = Not meaningful
Net sales
The following table highlights the drivers of change in net sales for the year ended December 31, 2021 versus December 31, 2020, by segment (in percentages).
Financial Volume Price and Sales Mix Currency Total
The following table highlights the drivers of change in net sales on a reported basis for the year ended December 31, 2020 versus December 31, 2019, by segment (in percentages).
Financial Volume Price and Sales Mix Currency Total
Net sales per hectoliter on a brand volume basis in local currency increased 3.8% for the year ended December 31, 2021 compared to prior year. The increase for the year ended December 31, 2021 was primarily due to positive net pricing in both the Americas and EMEA&APAC segments, as well as favorable sales mix resulting from portfolio premiumization and fewer on-premise channel restrictions. Net sales per hectoliter on a financial volume basis in local currency increased 5.2% for the year ended December 31, 2021, compared to prior year.
Worldwide brand volume decreased 1.7% for the year ended December 31, 2021, compared to prior year, while financial volume decreased 0.5% compared to prior year. The decline in brand volumes for the year ended December 31, 2021 was primarily due to lower economy portfolio volumes, including the de-prioritization of certain non-core SKUs in the U.S., partially offset by growth in the above premium portfolio volumes due to the increased premiumization efforts and favorable U.S. domestic shipments as we worked to rebuild distributor inventory levels.
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Cost of goods sold
Cost of goods sold per hectoliter in local currency increased 4.4% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to cost inflation mainly on input materials and transportation costs and the mix impacts of the portfolio premiumization and unfavorable foreign exchange movements, partially offset by changes to our unrealized mark-to-market commodity positions, lower depreciation and cost savings.
Marketing, general and administrative expenses
Marketing, general and administrative expenses increased 4.8% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to higher marketing spend in both the Americas and EMEA&APAC segments to support new innovations and core brands, as well as the cycling of lower spend in areas impacted by the coronavirus pandemic, partially offset by lower depreciation expense, cost savings and lower incentive compensation.
Special items, net
See Part II—Item 8 Financial Statements and Supplementary Data, Note 7, "Special Items" for detail of special items, net.
Total other income (expense), net
Total other income (expense), net improved 8.3% for the year ended December 31, 2021, compared to prior year primarily due to lower pension and OPEB non-service costs and lower interest expense driven by the repayment of debt as a result of our continued deleveraging actions.
Income taxes benefit (expense)
For the years ended
Effective tax rate 19 % (47) % 49 %
The increase in our effective tax rate for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to (i) the approximate $1.5 billion goodwill impairment charge in our EMEA&APAC segment recognized in the fourth quarter of 2020, and (ii) $18 million of tax expense recognized in the second quarter of 2021, which related to the remeasurement of our deferred tax liabilities following an announced corporate income tax rate increase in the U.K. from 19% to 25%. These increases to the effective tax rate were partially offset by $135 million of tax expense recognized in the second quarter of 2020 related to the hybrid regulations enacted in the U.S., and the release of $73 million of reserves for unrecognized tax positions as a result of an effective settlement reached on a tax audit during the third quarter of 2021. As a result of the effective settlement reached, which included resolution of the impact of the final U.S. tax hybrid regulations, we paid cash tax and associated interest of approximately $125 million in the fourth quarter of 2021.
Our tax rate can be more or less volatile and may change with, among other things, the amount and source of pre-tax income or loss, our ability to utilize foreign tax credits, excess tax benefits or deficiencies from share-based compensation, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Income Tax" for additional details regarding our effective tax rate.
Cost Savings Initiatives
Our next generation cost savings program, which began in 2020, is expected to deliver approximately $600 million of cost savings over the three year program through 2022 and is focused around many of the same functions of the business as the 2017 to 2019 program. These cost savings include approximately $150 million related to the revitalization plan. Total cost savings delivered in 2021 and 2020 totaled approximately $220 million and $270 million, respectively.
Depreciation and Amortization
Depreciation and amortization expense of $786.1 million for the year ended December 31, 2021 decreased by $135.9 million compared to $922.0 million for the year ended December 31, 2020, primarily due to the decrease in accelerated depreciation expense recorded as a result of certain facility closures as well as assets becoming fully depreciated during the year. See Part II—Item 8 Financial Statements and Supplementary Data, Note 7, "Special Items" for further discussion.
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Segment Results of Operations
Americas Segment
For the years ended
(In millions, except percentages)
(1)Includes gross inter-segment sales and volumes which are eliminated in the consolidated totals.
(2)Excludes royalty volume of 2.507 million hectoliters, 2.052 million hectoliters and 2.258 million hectoliters for 2021, 2020 and 2019, respectively. The results for 2019 were recasted to reflect the segment changes as part of the revitalization plan.
Net sales and volume
Net sales per hectoliter on a brand volume basis in local currency increased 3.2% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to positive net pricing and favorable brand mix, partially offset by unfavorable geographic mix attributed to growing license volume in Latin America. Net sales per hectoliter on a financial volume basis in local currency increased 4.0% for the year ended December 31, 2021, compared to the prior year.
Brand volume decreased 3.2% for the year ended December 31, 2021, compared to prior year. The decrease for the year ended December 31, 2021 was primarily due to a decline in the U.S. economy portfolio, including the de-prioritization and rationalization of non-core SKUs, partially offset by growth in Latin America and the U.S. above premium portfolio. Financial volumes decreased 2.0% for the year ended December 31, 2021, compared to prior year, due to lower brand volume, partially offset by favorable U.S. domestic shipment trends as we worked to rebuild distributor inventory levels.
Income (loss) before income taxes
Income (loss) before income taxes increased 8.9% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to positive net pricing and favorable brand mix, lower net special items charges, lower depreciation expense, and cost savings partially offset by cost inflation mainly on input materials and transportation costs, lower financial volumes and higher MG&A spend. The higher MG&A spend was driven by higher marketing spend to support new innovations and core brands and the cycling of lower spend in areas impacted by the coronavirus pandemic, partially offset by lower incentive compensation expense, cost savings and equity income from the TYC joint venture which started distribution in Texas in the third quarter of 2021.
EMEA&APAC Segment
For the years ended
(In millions, except percentages)
Income (loss) before income taxes $ 32.9 N/M $ (1,603.7) N/M $ 102.4
N/M = Not meaningful
(1)Includes gross inter-segment sales and volumes which are eliminated in the consolidated totals.
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(2)Excludes royalty volume of 1.968 million hectoliters, 1.731 million hectoliters and 1.968 million hectoliters for 2021, 2020 and 2019, respectively. The results for 2019 were recasted to reflect the segment changes as part of the revitalization plan.
Net sales and volume
Net sales per hectoliter on a brand volume basis in local currency increased 10.1% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to favorable geographic, channel and brand mix and positive net pricing. Net sales per hectoliter on a financial volume basis in local currency increased 15.1% for the year ended December 31, 2021, compared to prior year.
Brand volume increased 3.0% for the year ended December 31, 2021, compared to prior year. The increase for the year ended December 31, 2021 was primarily due to the benefit of fewer on-premise restrictions and growth in the above premium portfolio. Financial volumes increased 3.9% for the year ended December 31, 2021, compared to prior year, primarily due to higher brand volumes and factored sales.
Income (loss) before income taxes
Income (loss) before income taxes was income of $32.9 million for the year ended December 31, 2021 compared to a loss of $1,603.7 million in the prior year. The improvement of income (loss) before income taxes of $1,636.6 million for the year ended December 31, 2021 was primarily due to the cycling of special items in the prior year related to the $1.5 billion goodwill impairment of the EMEA&APAC segment, favorable sales mix, positive net pricing and higher financial volumes, partially offset bycost inflation and higher MG&A spend mainly due to the cycling of lower prior year spend in areas impacted by the coronavirus pandemic.
Unallocated Segment
We have certain activity that is not allocated to our segments and primarily includes financing-related costs such as interest expense and income, foreign exchange gains and losses on intercompany balances related to financing and other treasury-related activities, and the unrealized changes in fair value on our commodity swaps not designated in hedging relationships. Additionally, only the service cost component of net periodic pension and OPEB cost is reported within each operating segment, and all other components remain unallocated.
For the years ended
(In millions, except percentages)
Income (loss) before income taxes $ 29.6 N/M $ (120.7) (54.9) % $ (267.5)
N/M = Not meaningful
Cost of goods sold
The unrealized changes in fair value on our commodity derivatives, which are economic hedges, are recorded as cost of goods sold within unallocated and make up the entirety of the activity presented with cost of goods sold in the table above for 2021, 2020 and 2019. As the exposure we are managing is realized, we reclassify the gain or loss on our commodity derivatives to the segment in which the underlying exposure resides, allowing our segments to realize the economic effects of the derivative without the resulting unrealized mark-to-market volatility. See Part II—Item 8 Financial Statements and Supplementary Data, Note 16, "Derivative Instruments and Hedging Activities" for further information.
Total other income (expense), net
Total other expense, net decreased 9.3% for the year ended December 31, 2021 compared to the prior year primarily due to lower pension and OPEB non-service costs and lower interest expense driven by the repayment of debt as a result of our continued deleveraging actions. See Part II - Item 8. Financial Statements and Supplementary Data, Note 11 "Debt" for further details on our debt instruments. See Part II - Item 8 Financial Statements and Supplementary Data, Note 15, "Employee Retirement Plans and Postretirement Benefits" for further discussion of other pension and OPEB.
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Liquidity and Capital Resources
Liquidity
Overview
Our primary sources of liquidity have included cash provided by operating activities and access to external capital. However, the ongoing worldwide disruption caused by the coronavirus pandemic could materially affect our future access to our sources of liquidity. In the event of a sustained market deterioration and declines in net sales, profit and operating cash flow, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We currently believe that our cash and cash equivalents, cash flows from operations and cash provided by short-term and long-term borrowings, when necessary, will be adequate to meet our ongoing operating requirements, scheduled principal and interest payments on debt, capital expenditures and other obligations for the twelve months subsequent to the date of the issuance of this annual report, and our long-term liquidity requirements.
We continue to focus on navigating the ongoing challenges presented by the coronavirus pandemic by preserving our liquidity and managing our cash flow through taking preemptive actions to enhance our ability to meet our short-term liquidity needs. Specifically, we have taken several actions and considered various potential actions that may be needed to meet short-term and mid-term liquidity needs and have resources in place should we need to act on any of these quickly. Such potential actions include, but are not limited to, drawing on our $1.5 billion revolving credit facility, including issuing commercial paper under our U.S. commercial paper program (see Part II—Item 8. Financial Statements and Supplementary Data, Note 11, "Debt" regarding details of our current borrowings and remaining capacities under these programs), further accessing the capital markets, reducing discretionary spending including marketing, general and administrative as well as capital expenditures, asset monetization, and taking advantage of certain government-sponsored legislation and programs. We intend to maintain our investment grade debt rating as demonstrated by our continued deleveraging actions which included the repayment of our $1.0 billion 2.1% notes that were due July 2021.
We do not have any restrictions that prevent or limit our ability to declare or pay dividends. On July 15, 2021, our Company's Board of Directors reinstated a quarterly dividend after it was suspended during the second quarter of 2020 to preserve our liquidity position as a result of the coronavirus pandemic.
While we currently expect to have the necessary cash on hand to repay obligations when due, declines in net sales and profit could have a material adverse effect on our financial operations, cash flow and our ability to raise capital. The coronavirus pandemic is ongoing, and because of its dynamic nature, including uncertainties relating to the spread of variants, the rate of vaccinations and the efficacy of vaccines, the duration of the coronavirus pandemic, the duration of on-premise restrictions and closures and related prolonged weakening of economic or other negative conditions, including the impacts on the global supply chain and governmental reactions, we cannot fully anticipate future conditions given the substantial uncertainties in the economy in general. We may have unexpected costs and liabilities; revenue and cash provided by operations may decline; macroeconomic conditions may weaken; and competitive pressures may increase. These factors may result in difficulty maintaining liquidity, meeting our deleverage commitments and complying with our revolving credit facility covenants. As a result, our credit ratings could be downgraded, which would increase our costs of future borrowing and harm our ability to refinance our debt in the future on acceptable terms or at all. However, in anticipation of these uncertainties, we entered into Amendment No. 2 to our revolving credit facility on June 19, 2020. While the amendment did not increase our borrowing capacity or extend the term of the facility, it, among other things, revised the leverage ratios under the financial maintenance covenant for each fiscal quarter ending on or after June 30, 2020 through the maturity of the Credit Agreement.
There can be no assurance that we will be able to secure additional liquidity if our revolving credit facility is fully drawn, the capital markets become inaccessible or if our credit rating is adversely impacted, which may result in difficulties in accessing debt markets or increase our debt costs. Even if we have access to the capital markets, we may not be able to raise capital on acceptable terms or at all. If we are unable to maintain or access adequate liquidity, our ability to timely pay our obligations when due could be adversely affected.
Continued disruption and declines in the global economy could also impact our customers' liquidity and capital resources and therefore our ability to collect, or the timeliness of collection of our accounts receivable from them, which may have a material adverse impact on our performance, cash flows and capital resources. We continue to monitor our accounts receivable aging and have recorded reserves as appropriate. In addition, measures taken by governmental agencies to provide relief to businesses could further impact our ability to collect from customers. See Part II—Item 8 Financial Statements and Supplementary Data, Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for additional discussion related to our accounts receivable and associated reserves.
Additionally, in response to the coronavirus pandemic, various governmental authorities globally implemented relief programs which we continue to monitor and evaluate, such as the CARES Act in the U.S. Certain of these relief programs
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provide temporary deferrals of non-income based tax payments, which positively impacted our operating cash flows in 2020. Of the $130 million of temporary net tax payment deferrals as of December 31, 2020, approximately $105 million was repaid during the year ended December 31, 2021, with approximately $25 million outstanding as of December 31, 2021. The majority of the remaining balance is expected to be paid during the year ended December 31, 2022.
While a significant portion of our cash flows from operating activities is generated within the U.S., our cash balances may be comprised of cash held outside the U.S. and in currencies other than USD. As of December 31, 2021, approximately 76% of our cash and cash equivalents were located outside the U.S., largely denominated in foreign currencies. The recent fluctuations in foreign currency exchange rates may have a material impact on these foreign cash balances. When the earnings are considered indefinitely reinvested outside of the U.S., we do not accrue taxes. To the extent necessary, we accrue for tax consequences on the earnings of our foreign subsidiaries upon repatriation. We may utilize tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We periodically review and evaluate these plans and strategies, including externally committed and non-committed credit agreements accessible by the Company and each of its operating subsidiaries. We believe these financing arrangements, along with the cash generated from the operations of our U.S. business and other liquidity measures resulting from considerations of the ongoing coronavirus global pandemic, as discussed above, are sufficient to fund our current cash needs in the U.S.
Additionally, our cash balances in foreign countries are often subject to additional restrictions and covenants. We may therefore have difficulties repatriating cash held outside of the U.S., and such repatriation may be subject to tax. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and may adversely affect our liquidity.
Separately, as discussed in See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Income Tax", during third quarter 2021, an income tax audit settlement, which included resolution of the impact of the final U.S. tax hybrid regulations recorded in the second quarter of 2020, was reached with taxing authorities. The settlement resulted in the cash payment of approximately $125 million in the fourth quarter of 2021, including incremental tax liability and related interest.
Guarantor Information
SEC Registered Securities
For purposes of this disclosure, including the tables, "Parent Issuer" shall mean MCBC. "Subsidiary Guarantors" shall mean certain Canadian and U.S. subsidiaries reflecting the substantial operations of our Americas segment.
Pursuant to the indenture dated May 3, 2012 (as amended, the "May 2012 Indenture"), MCBC issued its outstanding 3.5% senior notes due 2022 and 5.0% senior notes due 2042. Additionally, pursuant to the indenture dated July 7, 2016, MCBC issued its outstanding 2.1% senior notes due 2021, 3.0% senior notes due 2026, 4.2% senior notes due 2046 and 1.25% senior notes due 2024. The 2.1% senior notes and its associated cross currency swap were subsequently repaid in July 2021 upon maturity using a combination of commercial paper borrowings and cash on hand. The senior notes issued under the May 2012 Indenture and the July 2016 Indenture were registered under the Securities Act of 1933, as amended. These senior notes are guaranteed on a senior unsecured basis by certain subsidiaries of MCBC, which are listed on Exhibit 22 of this Annual Report on Form 10-K (the "Subsidiary Guarantors", and together with the Parent Issuer, the "Obligor Group"). "Parent Issuer" in this section is specifically referring to MCBC in its capacity as the issuer of the senior notes under the May 2012 Indenture and the July 2016 Indenture. 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 was issued in a transaction that was registered with the SEC, and such other outstanding debt is issued or otherwise generally guaranteed on a senior unsecured basis by the Obligor Group or other consolidated subsidiaries of MCBC. These other guarantees are also full and unconditional and joint and several.
The senior notes and related guarantees rank pari-passu with all other unsubordinated debt of the Obligor Group and senior to all future subordinated debt of the Obligor Group. The guarantees can be released upon the sale or transfer of a Subsidiary Guarantors' capital stock or substantially all of its assets, or if such Subsidiary Guarantor ceases to be a guarantor under our other outstanding debt.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt" for details of all debt issued and outstanding as of December 31, 2021.
The following summarized financial information relates to the Obligor Group as of December 31, 2021 on a combined basis, after elimination of intercompany transactions and balances between the Obligor Group, and excluding the investments in
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and equity in the earnings of any non-guarantor subsidiaries. The balances and transactions with non-guarantor subsidiaries have been separately presented.
Summarized Financial Information of Obligor Group
(In millions)
Net sales, out of which: $ 8,402.5
Intercompany sales to non-guarantor subsidiaries $ 29.9
Gross profit, out of which: $ 3,394.1
Intercompany net costs from non-guarantor subsidiaries $ (421.0)
Net interest expense third parties $ (252.4)
Intercompany net interest income from non-guarantor subsidiaries $ 121.7
Income before income taxes $ 1,321.5
(In millions)
Total current assets, out of which: $ 1,834.4
Intercompany receivables from non-guarantor subsidiaries $ 155.5
Total noncurrent assets, out of which: $ 25,349.4
Total current liabilities, out of which: $ 2,725.8
Current portion of long-term debt and short-term borrowings $ 502.9
Intercompany payables due to non-guarantor subsidiaries $ 87.0
Total noncurrent liabilities, out of which: $ 13,714.9
Cash Flows and Use of Cash
Our business generates positive operating cash flow each year, and our debt maturities are of a longer-term nature. However, our liquidity could be impacted significantly by the risk factors described in Part I, Item 1A. "Risk Factors".
Cash Flows from Operating Activities
Net cash provided by operating activities of $1,573.5 million for the year ended December 31, 2021 decreased by $122.2 million compared to $1,695.7 million for the year ended December 31, 2020, primarily due to the unfavorable timing of working capital and higher cash paid for income taxes, partially offset by higher net income adjusted for non-cash add-backs and lower interest paid. The unfavorable timing of working capital included $230 million of an unfavorable impact related to prior year net tax payment deferrals, partially offset by the timing of receipts and payments related to higher financial volumes in the fourth quarter of 2021 compared to the fourth quarter of 2020. Prior year working capital benefited from approximately $130 million of net tax payment deferrals related to various government-sponsored payment deferral programs associated with the coronavirus pandemic, while in 2021 we made over $100 million of net repayments against the net tax payment deferrals.
Cash Flows from Investing Activities
Net cash used in investing activities of $509.9 million for the year ended December 31, 2021 increased by $96.3 million compared to $413.6 million for the year ended December 31, 2020, primarily due to lower proceeds from the sale of properties and other assets, including $150 million from the sale of the Irwindale Brewery completed in the fourth quarter of fiscal 2020, and higher net cash outflows from other investing activities, partially offset by lower capital expenditures.
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Cash Flows from Financing Activities
Net cash used in financing activities of approximately $1,172.2 million for the year ended December 31, 2021 increased by $101.8 million compared to $1,070.4 million for the year ended December 31, 2020, primarily due to higher net debt repayments and higher dividend payments, partially offset by lower net cash outflows from other financing activities.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt" for a summary of our financing activities and debt position as of December 31, 2021 and December 31, 2020.
Capital Resources, including Material Cash Requirements
Cash and Cash Equivalents
We had total cash and cash equivalents of $637.4 million as of December 31, 2021, compared to $770.1 million as of December 31, 2020. The decrease in cash and cash equivalents from December 31, 2020 to December 31, 2021 was primarily due to net debt repayments, including the repayment of our $1.0 billion 2.1% senior notes which matured in July 2021, capital expenditures and dividend payments, partially offset by net cash provided by operating activities and proceeds from the sale of properties and other assets.
See Part II—Item 8 Financial Statements and Supplementary Data, Consolidated Statements of Cash Flows for additional detail. The majority of our cash and cash equivalents are invested in a variety of highly liquid investments with original maturities of 90 days or less. These investments are viewed by management as low-risk investments on which there are little to no restrictions regarding our ability to access the underlying cash to fund our operations as necessary. While we have some investments in prime money market funds at times, these are classified as cash and cash equivalents; however, we continually monitor the need for reclassification under the SEC requirements for money market funds, and the potential that the shares of such funds could have a net asset value of less than one dollar. We also utilize cash pooling arrangements to facilitate the access to cash across our geographies.
Working Capital
We actively manage working capital through inventory management as well as management of accounts payable and accounts receivable to ensure we are able to meet short-term obligations and we are effectively using assets to increase cash inflows.
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Borrowings
In July 2021, we repaid our $1.0 billion 2.1% notes upon maturity. Notional amounts are presented in USD based on the applicable exchange rate as of December 31, 2021. Refer to Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt" for details.
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Based on the credit profile of our lenders that are party to our credit facilities, we are confident in our ability to continue to draw on our revolving credit facility if the need arises. As of December 31, 2021 and December 31, 2020, we had $1.5 billion available to draw under our $1.5 billion revolving credit facility, as there were no outstanding revolving credit facility or commercial paper borrowings.
We intend to further utilize our cross-border, cross currency cash pool as well as our commercial paper programs for liquidity as needed. We also have a JPY line of credit as well as JPY, CAD, GBP and USD overdraft facilities across several banks should we need additional short-term liquidity.
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.
The maximum leverage ratio, as defined by the amended revolving credit facility agreement as of the last day of the fiscal year ended December 31, 2021 is 4.00x net debt to EBITDA, through maturity of the credit facility. As of December 31, 2021 and December 31, 2020, we were in compliance with all of these restrictions, have met such financial ratios and have met all debt payment obligations. All of our outstanding senior notes as of December 31, 2021 rank pari-passu.
In October 2021, we further amended our existing revolving credit facility agreement to replace LIBOR with designated replacement rates for any future borrowings denominated in EUR or GBP to ensure continued, uninterrupted access to these markets should we need it.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt" for a complete discussion and presentation of all borrowings and available sources of borrowing, including lines of credit.
Guarantees
We guarantee indebtedness and other obligations to banks and other third parties for some of our equity method investments and consolidated subsidiaries. Guarantees of the outstanding third-party debt of our equity method investments, which are classified as current on the consolidated balance sheets, have been excluded from the contractual obligations table above. See Part II—Item 8 Financial Statements and Supplementary Data, Note 4, "Investments" and Note 18, "Commitments and Contingencies" for further discussion.
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Material Cash Requirements from Contractual and Other Obligations
A summary of our material cash requirements from our contractual and other obligations as of December 31, 2021, based on foreign exchange rates as of December 31, 2021, is as follows.
Payments due by period
Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
(In millions)
See Part II—Item 8 Financial Statements and Supplementary Data, Note 11, "Debt", Note 15, "Employee Retirement Plans and Postretirement Benefits,"Note 16, "Derivative Instruments and Hedging Activities,"Note 18, "Commitments and Contingencies" and Note 19, "Leases" for additional information.
(1)Represents expected contributions of $4.1 million under our defined benefit pension plans in the next twelve months and our benefit payments under postretirement benefit plans for all periods presented. The net underfunded liability as of December 31, 2021 of our defined benefit pension plans (excluding our overfunded plans) and postretirement benefit plans is $51.2 million and $648.7 million, respectively. Defined benefit pension plan contributions in future years will vary based on a number of factors, including actual plan asset returns and interest rates, and thus, have been excluded from the above table.
(2)See Part II—Item 8 Financial Statements and Supplementary Data, Note 18, "Commitments and Contingencies" for further discussion of the majority of the other long-term obligations which includes supply and distribution and advertising and promotions commitments. The remaining balance relates to derivative payments, sales and marketing, supply and distribution, information technology services, open purchase orders and other commitments.
Other Commercial Commitments
Based on foreign exchange rates as of December 31, 2021, future commercial commitments are as follows:
Amount of commitment expiration per period
(In millions)
Standby letters of credit $ 62.2 $ 59.1 $ 3.0 $ — $ 0.1
Credit Rating
Our current long-term credit ratings are BBB-/Stable Outlook, Baa3/Stable Outlook and BBB(Low)/Negative Outlook with Standard & Poor's, Moody's and DBRS, respectively. Our short-term credit ratings are A-3, Prime-3 and R-2(low), respectively. A securities rating is not a recommendation to buy, sell or hold securities, and it may be revised or withdrawn at any time by the applicable rating agency.
Capital Expenditures
We incurred $558.6 million, and paid $522.6 million, for capital improvement projects worldwide for the year ended December 31, 2021, excluding capital spending by equity method joint ventures, representing an increase of $28.6 million from the $530.0 million of capital expenditures incurred in the year ended December 31, 2020. This increase was primarily due to the timing of expenditures for capital projects. We continue to focus on where and how we employ our planned capital expenditures, with an emphasis on strengthening our focus on required returns on invested capital as we determine how to best allocate cash within the business.
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Contingencies
We are party to various legal proceedings arising in the ordinary course of business, environmental litigation and indemnities associated with our sale of Kaiser to FEMSA. See Part II—Item 8 Financial Statements and Supplementary Data, Note 18, "Commitments and Contingencies" for further discussion.
Off-Balance Sheet Arrangements
Refer to Part II—Item 8 Financial Statements, Note 18, "Commitments and Contingencies" for discussion of off-balance sheet arrangements. As of December 31, 2021, we did not have any other material off-balance sheet arrangements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make judgments and estimates that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Our estimates are based on historical experience, current trends and various other assumptions we believe to be relevant under the circumstances. We review the underlying factors used in our estimates regularly, including reviewing the significant accounting policies impacting the estimates, to ensure compliance with U.S. GAAP. However, due to the uncertainty inherent in our estimates, actual results may be materially different. We have identified the accounting estimates below as critical to understanding and evaluating the financial results reported in our consolidated financial statements.
For a complete description of our significant accounting policies, see Part II—Item 8 Financial Statements and Supplementary Data, Note 1, "Basis of Presentation and Summary of Significant Accounting Policies".
Pension and Other Postretirement Benefits
Our defined benefit pension plans cover certain current and former employees in the U.S., Canada and the U.K. Benefit accruals for the majority of employees in our U.S. and U.K. plans have been frozen and the plans are closed to new entrants. In the U.S., we also participate in, and make contributions to, multi-employer pension plans. Our OPEB plans provide medical benefits for retirees and their eligible dependents as well as life insurance and, in some cases, dental and vision coverage, for certain retirees in the U.S., Canada, and Europe. The U.S., Canada and U.K. defined benefit pension plans are primarily funded, but all OPEB plans are unfunded. We also offer defined contribution plans in each of our segments.
Accounting for pension and OPEB plans requires that we make assumptions that involve considerable judgment which are significant inputs in the actuarial models that measure our net pension and OPEB obligations and ultimately impact our earnings. These include the discount rate, long-term expected rate of return on assets, compensation trends, inflation considerations, health care cost trends and other assumptions, as well as determining the fair value of assets in our funded plans. Specifically, the discount rates, as well as the expected rates of return on assets and plan asset fair value determination, are important assumptions used in determining the plans' funded status and annual net periodic pension and OPEB costs. We evaluate these critical assumptions at least annually on a plan and country-specific basis. We also, with the help of actuaries, periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our net pension and postretirement benefit obligations and related expense.
Discount Rates
The assumed discount rates are used to present-value future benefit obligations based on each plan's respective estimated duration. Our pension and postretirement discount rates are based on our annual evaluation of high quality corporate bonds in various markets based on appropriate indices and actuarial guidance. We believe that our discount rate assumptions are appropriate; however, significant changes in our assumptions may materially affect our pension and OPEB obligations and related expense.
As of December 31, 2021, on a weighted-average basis, the discount rates used were 2.27% for our defined benefit pension plans and 2.59% for our OPEB plans. The change from the weighted-average discount rates of 1.84% for our defined benefit pension plans and 2.10% for our postretirement plans as of December 31, 2020 is primarily due to increasing interest rates in 2021.
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A 50 basis point change in our discount rate assumptions would have had the following effects on the projected benefit obligation balances as of December 31, 2021 for our pension and OPEB plans:
Impact to projected benefit obligation as of December 31, 2021 - 50 basis points
Decrease Increase
(In millions)
Projected benefit obligation - unfavorable (favorable)
Total impact to the projected benefit obligation $ 407.1 $ (365.4)
Our U.K. pension plan includes benefits linked to inflation. The above sensitivity analysis does not consider the implications to inflation resulting from the above contemplated discount rate changes. This sensitivity holds all other assumptions constant.
Long-Term Expected Rates of Return on Assets
The assumed long-term expected return on assets is used to estimate the actual return that will occur on each individual funded plan's respective plan assets in the upcoming year. We determine each plan's EROA with substantial input from independent investment specialists, including our actuaries and other consultants. In developing each plan's EROA, we consider current and expected asset allocations, historical market rates as well as historical and expected returns on each plan's individual asset classes. In developing future return expectations for each of our plan's assets, we evaluate general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads. The calculation includes inputs for interest, inflation, credit, and risk premium (active investment management) rates and fees paid to service providers. Based on the above factors and expected asset allocations, we have assumed, on a weighted-average basis, an EROA of 3.11% for our defined benefit pension plan assets for cost recognition in 2022. This is an increase from the weighted-average rate of 3.03% we assumed for 2021. We believe that our EROA assumptions are appropriate; however, significant changes in our assumptions or actual returns that differ significantly from estimated returns may materially affect our net periodic pension costs.
To compute the expected return on plan assets, we apply the EROA to the market-related value of the pension plan assets adjusted for projected benefit payments to be made from the plan assets and projected contributions to the plan assets. 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.
A 50 basis point change in our discount rate and expected return on assets assumptions made at the beginning of 2021 would have had the following effects on 2021 net periodic pension and postretirement benefit costs:
Decrease Increase
(In millions)
Description of pension and postretirement plan sensitivity item
Expected return on pension plan assets $ (25.4) $ 25.4
Discount rate on pension plans $ 5.6 $ (9.0)
Discount rate on postretirement plans $ 2.3 $ (2.0)
Fair Value of Plan Assets
We recognize our defined benefit pension plans as assets or liabilities in the consolidated balance sheets based on their underfunded or overfunded status as of our year end and recognize changes in the funded status due to changes in actuarial assumptions in the year in which the changes occur within other comprehensive income. Our funded status of our defined benefit pension plans is measured as the difference between each plan's projected benefit obligation and its assets' fair values. The fair value of plan assets is determined by us using available market information and appropriate valuation methodologies. However, considerable judgment is required in selecting an appropriate methodology and interpreting market data to develop the estimates of fair value, especially in the absence of quoted market values in an active market. Changes in these assumptions or the use of different market inputs may have a material impact on the estimated fair values or the ultimate amount at which the plan assets are available to satisfy our plan obligations.
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Equity assets are diversified between domestic and other international investments. Relative allocations reflect the demographics of the respective plan participants. See Part II—Item 8 Financial Statements and Supplementary Data, Note 15, "Employee Retirement Plans and Postretirement Benefits" for a comparison of target asset allocation percentages to actual asset allocations as of December 31, 2021.
Other Considerations
Our net periodic pension and postretirement benefit costs are also influenced by the potential amortization (or non-amortization) from accumulated other comprehensive income (loss) of deferred gains and losses, which occur when actual experience differs from estimates. We employ the corridor approach for determining each plan's amortization. This approach defines the “corridor” as the greater of 10% of the PBO or 10% of the market-related value of plan assets (as discussed above) 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 our closed plans or plans that are primarily inactive, the average remaining life expectancy of all plan participants (including retirees) is used. If our actuarial losses significantly exceed this corridor in the future, significant incremental pension and postretirement costs could result. As of year-end 2021, the deferred losses of several of our Canadian plans, as well as those in our U.K. plans, and the deferred gains of our U.S. plan, exceeded the 10% corridor.
The assumed health care cost trend rates represent the rates at which health care costs are assumed to increase and are based on actuarial input and consideration of historical and expected experience. We use these trends as a significant assumption in determining our postretirement benefit obligation and related costs. Changes in our projections of future health care costs due to general economic conditions and those specific to health care will impact this trend rate. An increase in the trend rate would increase our obligation and expense of our postretirement health care plan. We believe that our health care cost trend rate assumptions are appropriate; however, significant changes in our assumptions may materially affect our postretirement benefit obligations and related costs. As of December 31, 2021, the health care trend rates used were ranging ratably from 6.0% in 2022 to 3.57% in 2040, consistent with our health care trend rates ranging ratably from 6.0% in 2021 to 3.57% in 2040 as of December 31, 2020. See Part II—Item 8 Financial Statements and Supplementary Data, Note 15, "Employee Retirement Plans and Postretirement Benefits" for further information.
Contingencies, Environmental and Litigation Reserves
Contingencies, environmental and litigation reserves are recorded when probable, using our best estimate of loss. This estimate, involving significant judgment, is based on an evaluation of the range of loss related to such matters and where the amount and range can be reasonably estimated. These matters are generally resolved over a number of years and only when one or more future events occur or fail to occur. Following our initial determination, we regularly reassess and revise the potential liability related to any pending matters as new information becomes available. Unless capitalization is allowed or required by U.S. GAAP, environmental and legal costs are expensed when incurred. We disclose pending loss contingencies when the loss is deemed reasonably possible, which requires significant judgment. As a result of the inherent uncertainty of these matters, the ultimate conclusion and actual cost of settlement may materially differ from our estimates. We recognize contingent gains upon the determination that realization is assured beyond a reasonable doubt, regardless of the perceived probability of a favorable outcome prior to achieving that assurance. In the instance of gain contingencies resulting from favorable litigation, due to the numerous uncertainties inherent in a legal proceeding, gain contingencies resulting from legal settlements are not recognized in income until cash or other forms of payment are received. If significant and probable, we disclose as appropriate.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 18, "Commitments and Contingencies" for a discussion of our contingencies, environmental and litigation reserves as of December 31, 2021.
Goodwill and Intangible Asset Valuation
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.
We evaluate the carrying value of our goodwill and indefinite-lived intangible assets for impairment at least annually or when an interim triggering event occurs that would indicate that impairment may have taken place. Our annual impairment test of indefinite-lived intangible assets was performed as of October 1, the first day of the last fiscal quarter. We evaluate our other definite-lived intangible assets 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.
Our annual evaluation involves comparing each reporting unit's fair value to its respective carrying value, including goodwill. If the fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If a reporting
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unit's carrying value exceeds its fair value, we would recognize an impairment loss in an amount equal to the excess up to the total amount of goodwill allocated to that reporting unit.
We use a combination of discounted cash flow analyses and market approaches to determine the fair value of each of our reporting units, and an excess earnings approach to determine the fair values of our indefinite-lived brand intangible assets. We utilized a qualitative assessment for our water rights in the U.S. in order to determine whether the fair value of those indefinite-lived intangible assets was in excess of their carrying value. Our discounted cash flow projections include assumptions for growth rates for sales, costs and profits, which are based on various long-range financial and operational plans of each reporting unit or each indefinite-lived intangible asset. Additionally, discount rates used in our goodwill analysis are based on weighted-average cost of capital, driven by the prevailing interest rates in geographies where these businesses operate, as well as the credit ratings, financing abilities and opportunities of each reporting unit, among other factors. Discount rates for the indefinite-lived intangible analysis by brand largely reflect the rates supporting the overall reporting unit valuation but may differ slightly to adjust for country or market specific risk associated with a particular brand, among other factors. Our market-based valuations utilize earnings multiples of comparable public companies, which are reflective of the market in which each respective reporting unit operates.
Changes in the factors used in our fair value estimates, including the impacts of the coronavirus pandemic, declines in industry or company-specific beer volume sales, cost inflation or other margin erosion, termination of brewing and/or distribution agreements with other brewers, and discount rates used, could have a significant impact on the fair values of the reporting units and indefinite-lived intangible assets.
Reporting Units and Goodwill
As of the October 1, 2021 testing date, the fair value of our Americas reporting unit was estimated at approximately 6% in excess of its carrying amount and therefore no goodwill impairment charge was required for the Americas reporting unit. However, the Americas reporting unit is considered to be at risk for future impairments consistent with the 2020 testing results. The fair value in the current year is still largely impacted by the continued perceived risk of realizing management’s revitalization efforts and the ongoing impacts from the coronavirus pandemic. In addition, the fair value as of the 2021 test was impacted by assumptions related to increased cost inflation pressures in the medium term. The fair value of the Americas reporting unit is heavily dependent upon transforming our company including strengthening our iconic core brands, growing our above premium portfolio and expanding beyond beer. Despite successful launches of Blue Moon LightSky and Vizzy, and early success around products like Topo Chico Hard Seltzer and our joint venture expansion of Yuengling, there is not enough historical data yet to comfortably predict future impacts. Additionally, the fact that these products were launched in the midst of a global pandemic makes understanding and predicting their market positions and potential in a normal economy even more challenging. While the Americas reporting unit appears to be weathering the ongoing impacts of the pandemic and cost inflation, there is still inherent risk in achieving our goals. 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, including the further extent, duration and impact of the ongoing coronavirus pandemic on our reporting units. The key assumptions used to derive the estimated fair values of our reporting units represent Level 3 measurements. Goodwill allocated to the Americas reporting unit as of December 31, 2021 was $6.2 billion.
As of the October 1, 2020 testing date, the carrying value of the EMEA&APAC reporting unit was determined to be in excess of its fair value such that an impairment loss of $1,484.3 million, the full value of goodwill as of October 1, 2020, was recorded.
Indefinite-Lived Intangible Assets
The fair values of the Coors indefinite-lived brands in the Americas, the Miller indefinite-lived brands in the U.S. and the Carling brands in the U.K. continue to be sufficiently in excess of their respective carrying values as of the annual testing date.
The fair value of the Staropramen brand increased versus the prior year and is sufficiently in excess of its carrying value as of the annual testing date. The increase in the fair value of the Staropramen brand was a result of the progressive reopening of the on-premise business throughout Europe, but more impactfully Western Europe, during the year and the related improvement to expected future cash flows based on our long-range plan for this brand.
We utilize Level 3 fair value measurements in our impairment analysis of certain indefinite-lived intangible assets, including the Coors brands in the Americas, Miller brands in the U.S. and the Staropramen and Carling brands in EMEA&APAC. An excess earnings approach is used 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 a qualitative assessment of our water rights indefinite-lived intangible assets in the U.S. to determine whether it was more likely than not that the fair values of these assets
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were greater than their respective carrying amounts. Based on this qualitative assessment, 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 Americas reporting unit goodwill balance is at risk of future impairment in the event of significant unfavorable changes in the forecasted cash flows (including company-specific risks like the performance of our above premium transformation efforts and overall market performance of new innovations like hard seltzers, along with macro-economic risks like the continued prolonged weakening of economic conditions and cost inflation, or significant unfavorable changes in tax rates, 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 the Americas reporting unit testing reflect growth assumptions associated with our revitalization plan to build on the strength of our iconic core brands, aggressively grow our above premium portfolio, expand beyond the beer aisle, invest in our capabilities and support our people and our communities, all of which are intended to benefit the projected cash flows of the business. These cash flow assumptions are tempered somewhat by the impacts the coronavirus pandemic has had on our overall business and specifically our more profitable on-premise segment.
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 asset 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, an inability to execute on our strategic initiatives or an increase in costs that could significantly impact our immediate and long-range results, 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 global pandemic or recession), (iii) significant unfavorable changes in tax rates such as increased corporate income tax rates, (iv) volatility in the equity and debt markets or other country specific factors which could result in a higher weighted-average cost of capital, (v) sensitivity to market multiples; and (vi) 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, as well as for adverse changes in macroeconomic conditions such as the coronavirus pandemic and cost inflation that could significantly impact our immediate and long-range results. The related weakening of economic conditions either as a result of resurgences in the coronavirus pandemic or cost inflation could lead to a material impairment. Additionally, we are monitoring the impacts that the coronavirus pandemic and cost inflation have on the market inputs used in calculating our discount rates, including risk-free rates, equity premiums and our cost of debt, which could result in a meaningful change to our weighted-average cost of capital calculation, as well as the market multiples used in our impairment assessment. Furthermore, increased volatility in the equity and debt markets or other country specific factors, including, but not limited to, extended or future government intervention in response to the coronavirus pandemic, could also result in a meaningful change to our weighted-average cost of capital calculation and other inputs used in our impairment assessment. Separately, the Ontario provincial government in Canada 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 Part II—Item 8 Financial Statements and Supplementary Data, Note 18, "Commitments and Contingencies".
In 2021, the discount rate used in developing our annual fair value estimates for the Americas reporting unit was 8.25%, based on market-specific factors, as compared to 8.00% as of the October 1, 2020 annual testing date. The recent interest rate environment has resulted in an increase to the risk-free rate used in the current year discount rate calculations, which is reflected in the Americas higher discount rate. This discount rate also continues to be reflective of an unsystematic risk premium related to projected results of various new and unproven brands and innovations. The adverse effect of a higher discount rate driven by the recent interest rate environment is offset by improved cash flow projections for the Americas reporting unit. As we continue to recover from the coronavirus pandemic's impacts to the on-premise channel, the current year along with future projections have improved. The discount rates for the Miller brands in the U.S., and Coors brands in the Americas decreased compared to
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the discount rates used in the prior year analysis. For the Coors brands, this is primarily due to a reduction in the discount rate due to a lower risk premium, which was elevated in the prior year related to assumptions surrounding the launch of Coors Seltzer. Both brands also benefited from decreased perceived risk in meeting management’s cash flow projections as they did not rely on new and unproven brands and innovations included in our current year discount rate calculations for the Americas reporting unit. The discount rate for the Staropramen brands in EMEA&APAC increased compared to the discount rate used in the prior year analysis, primarily due to increases in the unsystematic risk premium related to risks associated with achieving the forecasted results while still in a global pandemic, particularly in Eastern Europe. Conversely, the discount rate for the Carling brands in the U.K. decreased compared to the discount rate used in the prior year analysis, primarily due to a decrease in the unsystematic risk premium as a result of the progressive reopening of the on-premise business throughout Western Europe, and specifically the U.K.
Current expectations driving our annual impairment testing as of October 1, 2021 have resulted in fair values of our Americas reporting unit and indefinite-lived intangible assets in excess of carrying values. However, if our assumptions are not realized, it is possible that further impairment charges may need to be recorded in the future. For example, a 50 basis point increase in our discount rate assumptions, which is within a reasonable range of historical discount rate fluctuations between test dates, would have had the following effects on the fair value cushion in excess of carrying value for the Americas reporting unit as of the October 1, 2021 test date:
Impact to the fair value cushion as of October 1, 2021- 50 basis points increase
Cushion (as reported) Cushion (post-sensitivity)
% of fair value in excess of carrying value
Americas Reporting Unit 6% 1%
Post sensitivity, the fair value of the Americas reporting unit remains in excess of its carrying values. The discount rate sensitivity holds all other assumptions and inputs constant.
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. In the current year, consistent with our revitalization plan, management made the decision to discontinue select economy SKUs and brands. It was determined that although these specific brand family line extensions had been discontinued, the brand family itself was still being used and produced. Additional evaluation was performed on these specific definite-lived brand intangible assets with no triggering events noted at the asset group level and no changes in useful life of the brand intangible assets deemed necessary. In 2020, we recognized impairment losses on some of our definite-lived intangible assets related to a few of our regional craft breweries in the Americas and EMEA&APAC segments, which were recorded in special items, net in the consolidated statement of operations. The impairment losses on the Grolsch brand and distribution agreement definite-lived intangible assets and the brand intangible asset related to our India business were recognized in 2019, and recorded in special items, net. See Part II—Item 8 Financial Statements and Supplementary Data Note 7, "Special Items" for further details on these impairment losses.
As of December 31, 2021, the carrying values of goodwill and intangible assets were approximately $6.2 billion and $13.3 billion, respectively. If actual performance results differ significantly from our projections or we experience significant fluctuations in our other assumptions, a material impairment loss may occur in the future. See Part II—Item 8 Financial Statements and Supplementary Data, Note 10, "Goodwill and Intangible Assets" for further discussion and presentation of these amounts.
Income Taxes
Income taxes are accounted for in accordance with U.S. GAAP. Judgment is required in determining our consolidated provision for income taxes. In the ordinary course of our global business, there are many transactions for which the ultimate tax outcome is uncertain. Additionally, our income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities.
We are periodically subject to tax controversies in various foreign and domestic jurisdictions, which can involve questions regarding our tax positions and result in additional income tax liabilities assessed against us. Settlement of any challenge resulting from these tax controversies can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. We recognize the tax benefit from an uncertain tax position 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. Our estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. Our liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with
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our various filing positions. Although we believe that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect our effective tax rate and tax provision.
When cash is available after satisfying working capital needs and all other business obligations, we may distribute cash from a foreign subsidiary to its U.S. parent and record the tax impact associated with the distribution. However, to the extent current earnings of our foreign operations exist and are not otherwise distributed or planned to be distributed, such earnings accumulate. These accumulated earnings are considered permanently reinvested in our foreign operations. We currently would not expect the aggregate of these permanently reinvested earnings, which are largely in deficit positions for U.S. tax purposes, to result in any material U.S. taxes, if distributed.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future 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. The realization of tax benefits is evaluated by jurisdiction and the realizability of these assets can vary based on the character of the tax attribute and the carryforward periods specific to each jurisdiction. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would decrease income tax expense in the period a determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would increase income tax expense in the period such determination was made.
There are proposed or pending tax law changes in various jurisdictions in which we do business. As discussed in Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Income Tax", we recognize the impacts of changes in tax law upon enactment, and therefore, proposed changes in tax law, regulations and rules are not reflected within our tax provision. As a result, such changes may, upon ultimate enactment, result in material impacts to our financial statements.
New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
See Part II-Item 8 Financial Statements and Supplementary Data, Note 2, "New Accounting Pronouncements" for a description of all new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of our global operations, we are exposed to market risks associated with foreign currency exchange fluctuations, volatile interest rates and commodity price risks. To manage our exposure to these market risks, we enter into certain supplier-based and market-based hedging transactions. Such transactions are allowed under our risk management policy and are monitored closely with clear controls around the activities. Our market-based transactions include a variety of derivative financial instruments, none of which are used for trading or speculative purposes. The counterparties to these market-based transactions are generally highly rated institutions. Our objective is to manage our exposures and to decrease the volatility of our earnings and cash flows as a result of changes in underlying rates and costs.
Interest Rate Risk
We are exposed to volatility in interest rates with regard to our current and future debt offerings. Specifically, we are exposed to U.S. Department of Treasury rates, Canadian government rates and LIBOR, or any such LIBOR alternative like SONIA, SOFR or EURIBOR, for example. We may from time to time enter into interest rate swaps on our current debt obligations as our hedging strategy is to achieve our desired fixed-to-floating rate debt profile such that we manage the volatility in earnings as well as the cost of funding our operations. Further, we may enter into forward starting interest rate swaps to manage our exposure to the volatility of interest rates associated with future interest payments on a forecasted debt issuance.
See Part II - Item 8. Financial Statements and Supplementary Data, Note 11. "Debt" for the maturity dates of our outstanding debt instruments.
The following table presents our fixed rate debt and forward starting interest rate swaps as well as the impact of an absolute 1% adverse change in interest rates on their respective fair values. Notional amounts and fair values are presented in USD based on the applicable exchange rate as of December 31, 2021 and December 31, 2020, respectively.
Notional amounts Fair Value Asset/(Liability) Effect of 1% Adverse Change
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Foreign Exchange Risk
Foreign currency exchange risk is inherent in our operations primarily due to operating results that are denominated in currencies other than the USD. We closely monitor our operations in each country and seek to adopt appropriate strategies that are responsive to foreign currency fluctuations. Our financial risk management policy is intended to offset a portion of the potentially unfavorable impact of exchange rates on our earnings and cash flows.
Changes in foreign currency exchange rates affect the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries, royalty agreements and transactions denominated in currencies other than the USD, and their related cash flows, specifically related to the purchase of production inputs and imports, as well as our foreign currency-denominated debt. See Part II - Item, 8. Financial Statements and Supplementary Data, Note 1. "Basis of Presentation and Summary of Significant Accounting Policies" for our accounting policy over the accounting for translation adjustments and foreign currency transactions.
Approximately $3.0 billion, or 30%, of our net sales was denominated in functional currencies other than the USD for the year ended December 31, 2021. As a result, fluctuations in foreign currency exchange rates other than the USD, particularly the CAD and the GBP, may have a material impact on our reported results. For the year ended December 31, 2021, net sales denominated in CAD and GBP was approximately $1.3 billion and $1.0 billion, respectively.
We manage our foreign currency exposures through foreign currency forward contracts and net investment hedges. Our EUR foreign-denominated debt is a net investment hedge against our investment in our Europe business in order to hedge a portion of the foreign currency translational impacts. The changes in fair value of the net investment hedge due to the fluctuations in the spot rate is recorded to AOCI. Our foreign currency forward contracts manage our exposure related to certain royalty agreements, the purchase of production inputs and imports that are denominated in currencies other than the functional entity's local currency and other foreign currency exchange exposure.
From time to time, we may enter into cross currency swaps. We settled the cross currency swaps associated with the $1.0 billion notes when they were repaid on July 15, 2021 and had no cross currency swaps outstanding as of December 31, 2021.
The following table includes details of our foreign currency forwards used to hedge our foreign exchange rate risk as well as the impact of a hypothetical 10% adverse change in the related foreign currency exchange rates on the fair value of the foreign currency forwards. Notional amounts and fair values are presented in USD based on the applicable exchange rate as of December 31, 2021 and December 31, 2020. The majority of our outstanding foreign currency forwards will mature in fiscal 2022.
Notional amounts Fair ValueAsset/(Liability) Effect of 10% Adverse Change
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Commodity Price Risk
We are exposed to the volatility in commodity prices as we use commodities in the production and distribution of our products. We specifically hedge our exposure to fluctuations in the price of natural gas, aluminum, barley and wheat. We utilize market-based derivatives and long-term supplier-based contracts, specifically a combination of purchase orders, long-term supply contracts and over-the-counter financial instruments to mitigate our commodity price risk by establishing price certainty for commodities that are used in our supply chain.
The following table includes details of our commodity swaps and options used to hedge commodity price risk as well as the impact of a hypothetical 10% adverse change in the related commodity prices on the fair value of the derivatives. Notional amounts and fair values are presented in USD based on the applicable exchange rate as of December 31, 2021 and December 31, 2020. Approximately 62% of commodity swaps mature in 2022, 33% mature in 2023, and 5% mature in 2024 and thereafter.
Notional amounts Fair Value Asset/(Liability) Effect of 10% Adverse Change
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
Consolidated Financial Statements:
Management's Report 68
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 69
Consolidated Statements of Operations 71
Consolidated Statements of Comprehensive Income (Loss) 72
Consolidated Balance Sheets 73
Consolidated Statements of Cash Flows 74
Consolidated Statements of Stockholders' Equity and Noncontrolling Interests 75
Notes to Consolidated Financial Statements 77
Note 2, "New Accounting Pronouncements" 87
Note 3, "Segment Reporting" 87
Note 4, "Investments" 90
Note 5, "Other Income and Expense" 92
Note 6, "Income Tax" 93
Note 7, "Special Items" 97
Note 8, "Stockholders' Equity" 99
Note 9, "Properties" 100
Note 10, "Goodwill and Intangible Assets" 100
Note 12, "Inventories" 107
Note 13, "Share-Based Payments" 107
Note 14, "Accumulated Other Comprehensive Income (Loss)" 110
Note 15, "Employee Retirement Plans and Postretirement Benefits" 112
Note 16, "Derivative Instruments and Hedging Activities" 122
Note 17, "Accounts Payable and Other Current Liabilities" 129
Note 18, "Commitments and Contingencies" 129
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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, 2021, 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, 2021, 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
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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, 2021 and 2020, 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, 2021, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2021 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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.
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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 matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - Americas Reporting Unit
As described in Notes 1 and 10 to the consolidated financial statements, the Company’s goodwill balance related to the Americas reporting unit as of December 31, 2021 is $6,153 million. 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 test is performed as of the first day of the fiscal fourth quarter. As disclosed by management, the evaluation involves comparing the reporting unit’s fair value to its carrying value. If the reporting unit’s carrying value exceeds its fair value, the Company would recognize an impairment loss in an amount equal to the excess up to the total amount of goodwill allocated to the reporting unit. A combination of a discounted cash flow analysis and market approach is used to determine the fair value of the 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 the Company’s reporting unit may include (i) as disclosed by management, growth rates for sales, costs and profits, which are based on various long-range financial and operational plans; (ii) prolonged weakening of economic conditions; or (iii) significant unfavorable changes in tax rates, 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 analysis.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the Americas reporting unit is a critical audit matter are (i) the significant judgment by management when determining the fair value of the Americas reporting unit; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the weighted average cost of capital, growth rates for sales, and market multiples; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
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 assessment, including controls over the valuation of the Americas reporting unit. These procedures also included, among others (i) testing management’s process for determining the fair value of the Americas reporting unit; (ii) evaluating the appropriateness of the discounted cash flow analysis and market approach; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow analysis and market approach; and (iv) evaluating the reasonableness of significant assumptions used by management related to the weighted average cost of capital, growth rates for sales, and market multiples. Evaluating the significant assumptions related to growth rates for sales involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the Americas reporting unit; (ii) the consistency with external market and industry 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 the evaluation of (i) the appropriateness of the Company’s discounted cash flow analysis and market approach and (ii) the reasonableness of the weighted average cost of capital and market multiple significant assumptions.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 23, 2022
We have served as the Company’s auditor since 1974.
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MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
For the Years Ended
Marketing, general and administrative expenses (2,554.5) (2,437.0) (2,728.0)
Other income (expense), net
Other pension and postretirement benefits (costs), net 46.4 30.3 2.9
Other income (expense), net (3.5) 6.0 (14.7)
Net (income) loss attributable to noncontrolling interests (2.8) (3.3) (4.5)
Net income (loss) attributable to Molson Coors Beverage Company per share:
Weighted-average shares outstanding:
Dilutive effect of share-based awards 0.5 — 0.3
Anti-dilutive securities excluded from computation of diluted EPS 1.8 2.7 1.3
See notes to consolidated financial statements.
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MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
For the Years Ended
Net income (loss) including noncontrolling interests $ 1,008.5 $ (945.7) $ 246.2
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (28.4) 113.6 177.6
Reclassification of cumulative translation adjustment to income (loss) 7.5 — —
Unrealized gain (loss) on derivative instruments 37.4 (85.7) (84.2)
Reclassification of derivative (gain) loss to income 5.5 (0.4) 0.5
Pension and other postretirement benefit adjustments 118.4 (39.9) (39.8)
Total other comprehensive income (loss), net of tax 161.3 (3.4) 63.2
See notes to consolidated financial statements.
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MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PAR VALUE)
As of
Assets
Current assets:
Cash and cash equivalents $ 637.4 $ 770.1
Accounts and other receivables:
Affiliate receivables 16.2 8.4
Liabilities and equity
Current liabilities:
Current portion of long-term debt and short-term borrowings 514.9 1,020.1
Pension and postretirement benefits 654.4 763.2
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) — —
Accumulated other comprehensive income (loss) (1,006.0) (1,167.8)
Total Molson Coors Beverage Company stockholders' equity 13,417.1 12,365.0
See notes to consolidated financial statements.
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MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
For the Years Ended
Cash flows from operating activities:
Net income (loss) including noncontrolling interests $ 1,008.5 $ (945.7) $ 246.2
Amortization of debt issuance costs and discounts 6.7 8.1 13.6
Payables and other current liabilities 285.5 (50.1) (53.0)
Other assets and other liabilities (40.1) 11.6 4.5
Cash flows from investing activities:
Proceeds from sales of properties and other assets 26.0 158.8 115.9
Net cash provided by (used in) investing activities (509.9) (413.6) (433.3)
Cash flows from financing activities:
Exercise of stock options under equity compensation plans 4.6 4.1 1.6
Proceeds on debt and borrowings — 1.5 3.0
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (108.6) 211.7 (543.0)
See notes to consolidated financial statements. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" for supplementary cash flow data.
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MOLSON COORS BEVERAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND NONCONTROLLING INTERESTS
(IN MILLIONS)
Molson Coors Beverage Company Stockholders' Equity
Common stock Exchangeable Accumulatedother Common Stockheld in Non
issued shares issued Paid-in- Retained comprehensive treasury controlling
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 — — — —
Purchase of noncontrolling interest 0.6 — — — — 0.1 — — — 0.5
Deconsolidation of VIE (1.7) — — — — — — — — (1.7)
Other comprehensive income (loss), net of tax 63.2 — — — — — — 62.6 — 0.6
Adoption of lease accounting standard 32.0 — — — — — 32.0 — — —
Reclassification of stranded tax effects — — — — — — 74.8 (74.8) — —
Contributions from noncontrolling interests 34.1 — — — — — — — — 34.1
Dividends declared (424.4) — — — — — (424.4) — — —
Exchange of shares — — — (0.2) (140.0) 140.2 — — — —
Shares issued under equity compensation plan (0.5) — — — — (0.5) — — — —
Amortization of share-based compensation 24.2 — — — — 24.2 — — — —
Other comprehensive income (loss), net of tax (3.4) — — — — — — (5.6) — 2.2
Contributions from noncontrolling interests 16.3 — — — — — — — — 16.3
Dividends declared (123.8) — — — — — (123.8) — — —
Exchange of shares — — — (0.1) — 0.1 — — — —
Shares issued under equity compensation plan 0.6 — — — — 0.6 — — — —
Amortization of share-based compensation 32.1 — — — — 32.1 — — — —
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Molson Coors Beverage Company Stockholders' Equity
Common stock Exchangeable Accumulatedother Common Stockheld in Non
issued shares issued Paid-in- Retained comprehensive treasury controlling
Purchase of noncontrolling interest (0.2) — — — — 0.3 — — — (0.5)
Other comprehensive income (loss), net of tax 161.3 — — — — — — 161.8 — (0.5)
Contributions from noncontrolling interests 3.2 — — — — — — — — 3.2
Dividends declared (148.4) — — — — — (148.4) — — —
See notes to consolidated financial statements.
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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"), principally a holding company, and its operating and non-operating subsidiaries included within our reporting segments. As of December 31, 2021, we changed the names of our reporting segments to the Americas and EMEA&APAC segments (formerly named the North America segment and Europe segment, respectively) to better reflect the geographic locations encompassed within the reportable segments. This change to our segment names had no impact on the composition of our segments, our financial position, results of operations, cash flow or segment level results previously reported. Our Americas segment operates in the U.S., Canada and various countries in the Caribbean, Latin and South America, and our EMEA&APAC segment operates in Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, the Republic of Ireland, Romania, Serbia, the U.K., various other European countries, and certain countries within the Middle East, Africa and Asia Pacific.
Unless otherwise indicated, comparisons are to comparable prior periods, and 2021, 2020 and 2019 refers to the twelve months ended December 31, 2021, December 31, 2020 and December 31, 2019, 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.
Cybersecurity Incident
During March 2021, we experienced a systems outage that was caused by a cybersecurity incident. We engaged leading forensic information technology firms and legal counsel to assist our investigation into the incident and we restored our systems after working to get the systems back up as quickly as possible. Despite these actions, we experienced delays and disruptions to our business, including brewery operations, production and shipments. This incident caused us to not produce or ship as much as we otherwise would have in the first quarter of 2021. Subsequently, in the balance of 2021, we made progress recovering from the incident with increased shipments and have operationally recovered as of December 31, 2021. In addition, we incurred certain incremental one-time costs of $2.4 million for the year ended December 31, 2021 related to consultants, experts and data recovery efforts, net of insurance recoveries.
Coronavirus Global Pandemic
Starting at the end of the first quarter of 2020, the coronavirus pandemic has had a material adverse effect on our operations, liquidity, financial condition and results of operations. In 2021, we saw improvements in the marketplace related to the coronavirus global pandemic as on-premise locations began to re-open around the world at varying degrees, despite setbacks in certain markets related to the outbreak of new variants. The extent to which our operations will continue to be impacted by the coronavirus pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the level of governmental or societal orders or restrictions on public gatherings and on-premise venues, including any vaccine mandates or testing requirements, the severity and duration of the coronavirus pandemic by market, including outbreaks of variants, changes in consumer behavior, the rate of vaccination and the efficacy of vaccines against the coronavirus and related variants. We continue to actively monitor the ongoing evolution of the coronavirus pandemic and resulting impacts to our business.
During 2020, we recorded charges of $15.5 million within cost of goods sold related to temporary "thank you" pay for certain essential Americas segment brewery employees. Additionally, in order to support and demonstrate our commitment to the continued viability of the many bars and restaurants which were negatively impacted by the coronavirus pandemic, during the first quarter of 2020, we initiated temporary keg relief programs in many of our markets. We committed to provide customers with reimbursements for untapped kegs that met certain established return requirements in conjunction with the voluntary programs. As a result, during 2020, we recognized a reduction to net sales of $30.3 million reflecting estimated sales returns and reimbursements through these keg relief programs.
Further, during 2020, we recognized charges of $12.1 million within cost of goods sold related to obsolete finished goods keg inventories that were not expected to be sold within our freshness specifications, as well as the costs to facilitate the above mentioned keg returns.
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We continue to monitor the impacts on our customers’ liquidity and capital resources and therefore our ability to collect, or the timeliness of collection of our accounts receivable. While these receivables are not concentrated in any specific customer and our allowance on these receivables factors in expected credit loss, continued disruption and declines in the global economy could result in difficulties in our ability to collect and require increases to our allowance for doubtful accounts. As of December 31, 2021 and December 31, 2020, our allowance for trade receivables was approximately $19 million and $18 million, respectively, and allowance activity was immaterial during the year ended December 31, 2021.
In response to the ongoing impacts of the coronavirus pandemic, various governmental authorities globally announced relief programs, which among other items, provided temporary deferrals of non-income based tax payments, which positively impacted our operating cash flows in 2020. These temporary net tax payment deferrals of approximately $25 million and $130 million as of December 31, 2021 and December 31, 2020, respectively, were primarily included within accounts payable and other current liabilities on our audited consolidated balance sheets. Of the $130 million of temporary net tax payment deferrals as of December 31, 2020, approximately $105 million was repaid during the year ended December 31, 2021, with approximately $25 million outstanding as of December 31, 2021. The majority of the remaining balance is expected to be paid during the year ended December 31, 2022.
We protected and supported our liquidity position in response to the global economic uncertainty created by the coronavirus pandemic. Beginning with the second quarter of 2020 through the second quarter of 2021, our board of directors suspended our regular quarterly dividends on our Class A and Class B common and exchangeable shares. A quarterly dividend was reinstated in the third quarter of 2021.
For considerations of the effects of the coronavirus pandemic and related potential impairment risks to our goodwill and indefinite-lived intangible assets, see Note 10, "Goodwill and Intangible Assets."
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. The revitalization plan established Chicago, Illinois as our Americas segment operational headquarters. We closed our office in Denver, Colorado and consolidated certain administrative functions into our other existing office locations. As of January 1, 2020, we changed our name to Molson Coors Beverage Company and changed our management structure to two segments - Americas and EMEA&APAC. We began to incur charges related to these restructuring activities during the fourth quarter of 2019 and we recognized severance and retention charges of $4.0 million, $35.6 million and $41.2 million during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. As of December 31, 2021, the revitalization plan restructuring charges were substantially complete.
See 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
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 where
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legally permitted, 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. 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., 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.
Disaggregation of Revenue
We have evaluated our primary revenue generating activities under the disaggregation disclosure criteria outlined within the guidance and concluded that disclosure at the geographical segment level depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. We have also evaluated our other revenue generating activities and concluded that these 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
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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.
For the years ended December 31, 2021 and December 31, 2020, 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 years ended December 31, 2021 or December 31, 2020.
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, 2021 or December 31, 2020. 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. Included in marketing, general and administrative expenses is total marketing and advertising expenses which were approximately $1.1 billion, $0.9 billion and $1.2 billion in 2021, 2020 and 2019, respectively. Marketing, general and administrative expenses also included integration costs of $25 million in 2019. There were no integration costs recorded in 2021 or 2020 as the activity related to the acquisition of the remaining portion of MillerCoors, which occurred on October 11, 2016 (the "Acquisition"), was completed by the end of 2019.
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
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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, net
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,
•impairment or asset abandonment-related losses,
•restructuring charges and other atypical employee-related costs, or
•fees on termination of significant operating agreements and gains (losses) on disposal of investments.
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 us 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.
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 the 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 and other equity securities 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 remain unallocated. 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.
When cash is available after satisfying working capital needs and all other business obligations, we may distribute such cash from a foreign subsidiary to its U.S. parent and record the tax impact associated with the distribution. However, to the extent current earnings of our foreign operations exist and are not otherwise distributed or planned to be distributed, such earnings accumulate. These accumulated earnings are considered permanently reinvested in our foreign operations. We currently would not expect the aggregate of these permanently reinvested earnings, which are largely in deficit positions for U.S. tax purposes, to result in any material U.S. taxes, if distributed.
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The tax benefit from an uncertain tax position is recognized only if it is determined that the tax position will more likely 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.
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 hedging relationships and derivative and non-derivative instruments designated in 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.
Dividends
Dividends per share paid to shareholders were $0.68, $0.57 and $1.96 during the years ended December 31, 2021, 2020 and 2019, respectively. In response to the global economic uncertainty created by the coronavirus pandemic, our Board of Directors suspended our regular quarterly dividend on our Class A and Class B common and exchangeable shares in May 2020. A quarterly dividend was reinstated during the third quarter of 2021.
Cash and Cash Equivalents