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CEDC > SEC Filings for CEDC > Form 10-Q/A on 5-Oct-2012All Recent SEC Filings

Show all filings for CENTRAL EUROPEAN DISTRIBUTION CORP

Form 10-Q/A for CENTRAL EUROPEAN DISTRIBUTION CORP


5-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto appearing elsewhere in this report.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information.

This report (and other oral and written statements we have made or make, including press releases containing information about our business, results of operations, financial condition, guidance and other business developments), contains forward-looking statements, which provide our current expectations or forecasts of future events. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "anticipates," "expects," "intends," "may," "will" or "should" or, in each case, their negative, or other variations or comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include, without limitation:

• information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth, liquidity, prospects, strategies and the industry in which the Company and its affiliates operate, as well as the integration of recent acquisitions and other investments and the effect of such acquisitions and other investments on the Company;

• statements about the expected level of our costs and operating expenses, and about the expected composition of the Company's revenues;

• information about the impact of governmental regulations on the Company's businesses;

• statements about local and global credit markets, currency exchange rates and economic conditions;

• other statements about the Company's plans, objectives, expectations and intentions including with respect to its credit facility and other outstanding indebtedness; and

• other statements that are not historical facts.

By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, the development of the industries in which we operate, and the effects of acquisitions and other investments on us may differ materially from those anticipated in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

We urge you to read and carefully consider the items of this and other reports and documents that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect our future performance and the industry in which we operate, including the risk factors described in this report and in the Company's Annual Report on Form 10-K filed with the SEC on February 29, 2012. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur as described, or at all.

You should not unduly rely on these forward-looking statements, because they reflect our views only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect on the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this report.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto found elsewhere in this report.


Table of Contents

Overview

The Company is one of the world's largest vodka producers and Central and Eastern Europe's largest integrated spirit beverages business with its primary operations in Poland, Russia and Hungary. During 2011, the Company continued its strategy of integrating the business in Russia following the buyout of the remaining stake in Whitehall in the first quarter of 2011 when the Company took full economic and controlling ownership of the business. During the first quarter of 2012, the Company continued to focus on developing sales volumes in its key markets of Poland and Russia as well as reorganizing the Russia operations. Both the Polish and Russian vodka markets continued to see an overall market decline. In Poland, however, the Company was able to see year on year domestic volume and value growth for the quarter ending March 31, 2012 primarily due to the continued success of ?ubrówka Bia?a and the higher margin flavored segment including Soplica. Total Russian volumes were down which were driven mainly by lower domestic vodka volumes, as a result of wholesalers de-stocking to lower levels of inventory and reduced sales to key accounts, during our renegotiations in the first quarter of 2012, partially offset by higher export volumes. On the domestic vodka front, sales volumes for the first quarter 2012 in Russia were down by 15% as compared to 2011, however, sell out from wholesalers to the retail trade was only down 8%-9% reflecting the impact of continued de-stocking. Finally spirit, which is the main ingredient in vodka production showed signs of stabilizing in both Russia and Poland, however Russia is still impacted as compared to the same quarter in the prior year due to the rapid increases in spirit prices during 2011.

Restatement

The Company is restating its unaudited condensed consolidated financial statements for the three months ended March 31, 2012 and 2011. The Restatement corrects certain accounting errors primarily related to the accounting for retroactive rebates provided to customers during those periods, accounting for revenue transactions, asset write offs, cut off errors and income taxes. The Restatement also includes reclassifications of accounts payable for periods prior to 2011 to conform to the current presentation. All amounts in Management's Discussion and Analysis of Financial Conditions and Results of Operations (Restated) have been adjusted, as appropriate, for the effects of the Restatement. For a more detailed description of the Restatement, see Note 2, "Restatement of unaudited condensed consolidated financial statements", to the accompanying condensed consolidated financial statements.

Significant factors affecting our consolidated results of operations

Effect of Exchange Rate and Interest Rate Fluctuations

Substantially all of Company's operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is due to the movement of the average exchange rate used to restate the statements of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statements of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint. The table below presents the exchange rates used for translation of our balance sheet and statement of operations balances as of and for the quarter ended March 31, 2012:

                          Balance sheet rate       Average rate for the
                                 as of              three months ended
                            March 31, 2012            March 31, 2012
              PLN / US$                3.1191                     3.2249
              RUR / US$               29.3148                    30.1674
              HUF / US$              221.2128                   225.5175

Because the Company's reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company's financial condition and results of operations and have affected the comparability of our results between financial periods.

The Company also has borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company's functional currencies is to increase or decrease the value of the Company's liabilities on that debt in terms of the Company's functional currencies when those functional currencies depreciate or appreciate in value, respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company's operations.

                                                                            Pre-tax impact of a 1%
   Exchange Rate                   Value of notional amount                movement in exchange rate
USD-Polish zloty          $426 million                                    $     4.3 million gain/loss
USD-Russian ruble         $264 million                                    $     2.6 million gain/loss
EUR-Polish zloty          €430 million or approximately $574 million      $     5.7 million gain/loss


Table of Contents

Results of Operations:

Three months ended March 31, 2012 compared to three months ended March 31, 2011

A summary of the Company's operating performance (expressed in thousands except
per share amounts) is presented below.



                                                          Three months ended March 31,
                                                            2012                 2011
                                                         (Restated)           (Restated)
Sales                                                  $      321,756         $   318,081
Excise taxes                                                 (175,767 )          (179,727 )

Net sales                                                     145,989             138,354
Cost of goods sold                                             90,874              85,685

Gross profit                                                   55,115              52,669

Selling, general and administrative expenses                   58,934              55,370
Gain on remeasurement of previously held equity
interests                                                           0              (7,898 )

Operating income / (loss)                                      (3,819 )             5,197

Non operating income / (expense), net
Interest income / (expense), net                              (26,302 )           (26,852 )
Other financial income / (expense), net                        97,588              30,522
Other non operating income / (expense), net                    (2,598 )              (976 )

Income before taxes and equity in net income from
unconsolidated investments                                     64,869               7,891

Income tax expense                                             (4,685 )            (1,979 )
Equity in net losses of affiliates                                  0              (7,946 )

Net income attributable to the company                         60,184              (2,034 )

Net income from operations per share of common
stock, basic                                           $         0.83         $     (0.03 )
Net income from operations per share of common
stock, diluted                                         $         0.82         $     (0.03 )
Other comprehensive loss, net of tax:
Foreign currency translation adjustments                       22,524             134,173

Comprehensive income attributable to the company       $       82,708         $   132,139


Table of Contents

Net Sales

Net sales represent total sales net of all customer rebates, excise tax on production and imports, and value added tax. Total net sales increased by approximately 5.5%, or $7.6 million, from $138.4 million for the three months ended March 31, 2011 to $146.0 million for the three months ended March 31, 2012. The increase was driven by the consolidation of Whitehall only for two months in 2011 comparing to a full quarter in 2012 of $6.5 million and higher local currency sales value of $9.2 million. These increases were partially offset by the impact of foreign currency exchange translation of $8.1 million. In Russia although sales volumes were lower, this was offset by improved pricing and lower trade marketing spend in the quarter.

                                           Segment Net Sales
                                     Three months ended March 31,
                                       2012                 2011
                                    (Restated)           (Restated)
                Segment
                Poland            $       47,135       $       46,617
                Russia                    93,426               86,579
                Hungary                    5,428                5,158

                Total Net Sales   $      145,989       $      138,354

Sales for Poland increased by $0.5 million from $46.6 million for the three months ended March 31, 2011 to $47.1 million for the three months ended March 31, 2012. This increase was driven mainly by volume growth of domestic vodkas of 7% and export volume growth of 17%, resulting in a net sales value increase of $5.5 million, or 11.8% in local currency terms, offset by weaker Polish zloty against the U.S. dollar which accounted for approximately $5.0 million of sales in U.S. dollar terms. The Company continued to see strong demand for its ?ubrówka Bia?a as well as higher margin flavored vodkas including Soplica.

Sales for Russia increased by $6.8 million from $86.6 million for the three months ended March 31, 2011 to $93.4 million for the three months ended March 31, 2012. Local currency sales value increased by $2.8 million, which was driven by overall lower sales volumes of 15% offset by improved pricing and lower trade marketing. Lower sales volumes in Russia were primarily due to an overall weak vodka market in Russia, with total sales volumes in the industry down during the quarter, as well as continued lower inventory levels in the wholesale trade and reduced sales to key accounts during our renegotiations in the first quarter of 2012. The 15% decline in domestic sales represents the decline in sales into the trade, whereas sales out of the trade to the end customer was only down 8%-9%, with the difference due to the impact of de-stocking. The sales value decrease of the Russian business was also driven by the weakening of the Russian ruble against the U.S. dollar which accounted for approximately $2.5 million of sales in U.S. dollar terms. This was partially offset by the effect of consolidation of Whitehall only for two months in 2011 comparing to full quarter in 2012, resulting in a year on year increase of $6.5 million.

Sales for Hungary increased by $0.2 million from $5.2 million for the three months ended March 31, 2011 to $5.4 million for the three months ended March 31, 2012 which resulted in a $0.9 million increase in volumes on local currency terms offset by a weaker Hungarian forint against the U.S. dollar which accounted for approximately $0.7 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit increased by approximately 4.6%, or $2.4 million, to $55.1 million for the three months ended March 31, 2012, from $52.7 million for the three months ended March 31, 2011. The increase in margin was driven primarily by the higher sales value in Russia. Gross profit margins as a percentage of net sales decreased by 0.3 percentage points from 38.1% to 37.8 % for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The change in gross margin percentage was driven by the year on year growth of spirit pricing which resulted in approximately $3.2 million of additional cost in the first quarter of 2012. The spirit prices in Russia have however recently begun to stabilize since January 2012, and in Poland spirit prices have been stable since February 2011 and into the beginning of 2012.

Operating Expenses

Operating expenses consist of selling, general and administrative, or "SG&A" expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses excluding fair value adjustments increased by $3.5 million, from $55.4 million for the three months ended March 31, 2011 to $58.9 million for the three months ended March 31, 2012. For comparability of costs between periods, operating expenses, after excluding the fair value adjustments, are shown separately in the table below. As a percent of net sales they increased from 40.0% for the three months ended March 31, 2011 to 40.4% for the three months ended March 31, 2012.


Table of Contents

The table below sets forth the items of operating expenses.

                                                 Operating Expenses
                                                 Three Months Ended
                                                     March 31,
                                               2012             2011
                                            (Restated)       (Restated)
            SG&A                            $    50,088     $     48,253
            Marketing                             6,490            4,266
            Depreciation and amortization         2,356            2,851

            Sub-Total                            58,934           55,370
            Fair value adjustments                    0           (7,898 )

            Total operating expense         $    58,934     $     47,472

SG&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. SG&A expenses increased by $1.8 million, from $48.3 million for the three months ended March 31, 2011 to $50.1 million for the three months ended March 31, 2012. The increase in SG&A is primarily due to the inclusion of a full quarter of the Whitehall Group in 2012 of $4.0 million, redundancy costs in Russia of $2.2 million as well as over all inflationary increases including transport costs in Russia.

Marketing expenses increased by $2.2 million, from $4.3 million for the three months ended March 31, 2011, to $6.5 million for the three months ended March 31, 2012, mainly due to higher marketing spending primarily in Russia and Ukraine.

Depreciation and amortization decreased by $0.5 million, from $2.9 million for the three months ended March 31, 2011 to $2.4 million for the three months ended March 31, 2012.

Operating Income

Total operating income decreased by $9.0 million, from $5.2 million income for
the three months ended March 31, 2011 to $3.8 million loss for the three months
ended March 31, 2012, primarily driven by lower domestic sales and higher spirit
costs in the Russian market. The table below summarizes the segmental split of
operating profit.



                                                             Operating Income/(Loss)
                                                           Three months ended March 31,
                                                          2012                     2011
                                                       (Restated)               (Restated)
Segment
Poland before fair value adjustments                  $       6,480            $       4,793
Gain on remeasurement of previously held equity
interests                                                         0                    7,898

Poland after fair value adjustments                           6,480                   12,691
Russia                                                       (8,463 )                 (6,220 )
Hungary                                                         720                      661
Corporate Overhead
General corporate overhead                                   (1,692 )                 (1,242 )
Option Expense                                                 (864 )                   (693 )

Total Operating Profit/(Loss)                         $      (3,819 )          $       5,197

Underlying operating income in Poland excluding fair value adjustments increased by approximately 35.4%, or $1.7 million, from $4.8 million for the three months ended March 31, 2011 to $6.5 million for the three months ended March 31, 2012. The operating loss in Russia increased by $2.3 million from 6.2 million loss for the three months ended March 31, 2011 to $8.5 million loss for the three months ended March 31, 2012. The changes in operating income in both of these segments were driven by all of the factors described above.

Non Operating Income and Expenses

Total interest expense decreased by approximately 2.2%, or $0.6 million, from $26.9 million for the three months ended March 31, 2011 to $26.3 million for the three months ended March 31, 2012. This decrease was primarily driven by the euro exchange rate as compared to the Polish zloty.


Table of Contents

The Company recognized $97.6 million of non-cash unrealized foreign exchange rate income in the three months ended March 31, 2012, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $30.5 million of gain in the three months ended March 31, 2011.

Total other non-operating expenses increased by $1.6 million, from a loss of $1.0 million for the three months ended March 31, 2011 to a loss of $2.6 million for the three months ended March 31, 2012.

                                                           Three months ended March 31,
                                                            2012                   2011
Factoring costs and bank fees                                   (2,262 )               (671 )
Other gains / (losses)                                            (336 )               (305 )

Total other non operating income / (expense), net $ (2,598 ) $ (976 )

Income Tax

Our effective tax rate for the three months ended March 31, 2012 was 7.2% as compared to an average blended statutory rate of 21%. The difference in effective tax rates was due primarily to permanent tax differences related to the treatment of unrealized foreign exchange rate gains in Poland.

Statement of Liquidity and Capital Resources

During the three months ended March 31, 2012, the Company's primary sources of liquidity were cash flows generated from operations. The Company's primary uses of cash were to fund its working capital requirements, service indebtedness and finance capital expenditures. The following table sets forth selected information concerning the Company's consolidated cash flow during the periods indicated.

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