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| BREW > SEC Filings for BREW > Form 10-Q on 7-Nov-2012 | All Recent SEC Filings |
7-Nov-2012
Quarterly Report
This quarterly report on Form 10-Q includes forward-looking statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will," "may," "plan" and similar expressions or their negatives identify forward-looking statements, which generally are not historical in nature. These statements are based upon assumptions and projections that we believe are reasonable, but are by their nature inherently uncertain. Many possible events or factors could affect the Company's future financial results and performance, and could cause actual results or performance to differ materially from those expressed, including those risks and uncertainties described in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Annual Report"), and those described from time to time in our future reports filed with the Securities and Exchange Commission (the "SEC"). Caution should be taken not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein, as well as the audited Consolidated Financial Statements and Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2011 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.
Overview
Craft Brew Alliance is the union of four unique and pioneering craft beer brands:
· Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;
· Widmer Brothers Brewery founded by brothers Kurt and Rob Widmer in 1984 in Portland, Oregon;
· Kona Brewing Co. founded by father and son team Cameron Healy and Spoon Khalsa in 1994 in Kona, Hawaii; and
· Omission Beer internally developed by CBA's brewing team in 2012 in Portland, Oregon.
Since our formation, we have focused our business activities on satisfying consumers through the brewing, marketing and selling of high-quality craft beers in the United States. Today, as an independent craft brewer, we possess several distinct advantages, unique in the craft beer category. These advantages are rooted and leveraged through the combination of our innovative quality craft beers; the strength of our distinct, authentic brand portfolio; our seamless national distribution and national sales and marketing reach; our financial capabilities as a public company; our owned brew pubs; and our bi-coastal breweries.
We proudly brew our craft beers in four company-owned breweries including three mainland breweries located in Portsmouth, New Hampshire; Portland, Oregon; and the Seattle suburb of Woodinville, Washington; and one Hawaii brewery located in Kailua-Kona, Hawaii. We also own and operate a small pilot brewery, primarily used for small batch production and innovative brews, at the Rose Quarter in Portland, Oregon.
We sell our beers primarily to wholesalers via a Master Distributor Agreement (the "A-B Distributor Agreement") with Anheuser-Busch, LLC ("A-B"). Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 31 states. Omission Beer recently became available nationally and we continue to expand into new markets. Separate from our A-B wholesalers, we maintain an independent sales and marketing organization complete with resources across the key functions of brand management, field marketing, field sales, and national retail sales.
We operate in two segments: Beer Related operations and Pubs. Beer Related operations include the brewing and sale of craft beers from our five breweries, both domestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our Beer Related operations, other merchandise sales, and sales of our beers directly to customers.
New Brands and Packaging
During the second quarter of 2012, we introduced Omission Beer, the first craft
beer brand in the United States focused exclusively on brewing great tasting
craft beers with traditional beer ingredients, including malted barley, that are
specially crafted to remove gluten. The brand includes two styles: Omission
Lager and Omission Pale Ale. Unlike many other beers in the fast-growing
gluten-free category, Omission beers have flavor profiles that consumers would
expect from traditionally brewed lagers and pale ales. Our innovative brewing
process, which allows us to reduce the gluten levels to well below the widely
accepted international Codex gluten-free standard of 20 parts per million for
food and beverages, is unique to Omission Beer.
In March and April 2012, we began offering Kona Longboard Island Lager and Redhook Long Hammer IPA, respectively, in 12 oz. cans on a national basis. These new packages allow Kona Brewing and Redhook fans to enjoy our craft beers during more occasions - especially those where glass bottles may not be the best option, such as on the beach, in the ballpark or at the pool.
In August 2012, Kona Big Wave Golden Ale, which had previously only been available in Hawaii, joined Kona's portfolio on the mainland that includes its flagship Longboard Island Lager, Fire Rock Pale Ale and the trio of Aloha Series seasonals. Big Wave Golden Ale is one of Kona's original beers, first brewed at our Kailua-Kona home brewery in 1995, and is a great session beer with a bright, quenching finish. Like Longboard, Big Wave Golden Ale is a year-round offering and is available in all of Kona's markets.
Results of Operations
Following is a summary of our financial results:
Nine Months Number of
Ended Net Barrels
September 30, Net Sales Income Sold
2012 $ 127.4 million $ 2.2 million 549,700
2011 $ 114.3 million $ 9.4 million (1) 520,500
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(1) Includes the one-time gain on sale of Fulton Street Brewery, LLC of $6.5 million, net of tax.
The following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Income expressed as a percentage of Net sales(1):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Sales 107.5 % 107.8 % 107.7 % 108.0 %
Less excise tax 7.5 7.8 7.7 8.0
Net sales 100.0 100.0 100.0 100.0
Cost of sales 69.4 68.6 69.6 69.0
Gross profit 30.6 31.4 30.4 31.0
Selling, general and
administrative expenses 26.7 26.0 27.1 26.7
Operating income 3.9 5.4 3.3 4.3
Income from equity method
investment - - - 0.6
Gain on sale of Fulton Street
Brewery, LLC - - - 9.1
Interest expense (0.4 ) (0.5 ) (0.4 ) (0.7 )
Interest income and other, net - 0.1 - -
Income before income taxes 3.5 4.9 2.9 13.4
Income tax provision 1.4 1.9 1.2 5.2
Net income 2.1 % 3.0 % 1.7 % 8.2 %
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(1) Percentages may not add due to rounding.
Segment Information
Net sales, Gross profit and gross margin information by segment was as follows
(dollars in thousands):
Three Months Ended September 30,
Beer
2012 Related Pubs Total
Net sales $ 37,880 $ 6,708 $ 44,588
Gross profit $ 12,321 $ 1,303 $ 13,624
Gross margin 32.5 % 19.4 % 30.6 %
2011
Net sales $ 34,262 $ 6,215 $ 40,477
Gross profit $ 11,533 $ 1,182 $ 12,715
Gross margin 33.7 % 19.0 % 31.4 %
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Nine Months Ended September 30,
Beer
2012 Related Pubs Total
Net sales $ 109,364 $ 17,987 $ 127,351
Gross profit $ 35,679 $ 2,990 $ 38,669
Gross margin 32.6 % 16.6 % 30.4 %
2011
Net sales $ 97,583 $ 16,687 $ 114,270
Gross profit $ 32,477 $ 2,924 $ 35,401
Gross margin 33.3 % 17.5 % 31.0 %
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Sales by Category
The following tables set forth a comparison of sales by category (dollars in
thousands):
Three Months Ended Sept. 30, Dollar
Sales by Category 2012 2011 Change % Change
A-B and A-B related $ 38,872 $ 34,576 $ 4,296 12.4 %
Contract brewing and beer related(1) 2,371 2,842 (471 ) (16.6 )%
Excise taxes (3,363 ) (3,156 ) (207 ) 6.6 %
Net beer related sales 37,880 34,262 3,618 10.6 %
Pubs(2) 6,708 6,215 493 7.9 %
Net sales $ 44,588 $ 40,477 $ 4,111 10.2 %
Nine Months Ended Sept. 30, Dollar
Sales by Category 2012 2011 Change % Change
A-B and A-B related $ 110,885 $ 99,621 $ 11,264 11.3 %
Contract brewing and beer related(1) 8,249 7,134 1,115 15.6 %
Excise taxes (9,770 ) (9,172 ) (598 ) 6.5 %
Net beer related sales 109,364 97,583 11,781 12.1 %
Pubs(2) 17,987 16,687 1,300 7.8 %
Net sales $ 127,351 $ 114,270 $ 13,081 11.4 %
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(1) Beer related includes international beer sales.
(2) Pubs sales include sales of promotional merchandise and sales of beer directly to customers.
Shipments by Category
Shipments by category were as follows (in barrels):
Three Months 2012 2011 Increase % Change in
Ended September 30, Shipments Shipments (Decrease) Change Depletions(1)
A-B and A-B related 173,700 161,000 12,700 7.9 % 4 %
Contract brewing and beer related(2) 12,100 16,700 (4,600 ) (27.5 )%
Pubs 3,500 3,800 (300 ) (7.9 )%
Total 189,300 181,500 7,800 4.3 %
Nine Months 2012 2011 Increase % Change in
Ended September 30, Shipments Shipments (Decrease) Change Depletions(1)
A-B and A-B related 496,300 470,900 25,400 5.4 % 5 %
Contract brewing and beer related(2) 44,600 40,300 4,300 10.7 %
Pubs 8,800 9,300 (500 ) (5.4 )%
Total 549,700 520,500 29,200 5.6 %
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(1) Change in depletions reflects the year-over-year change in barrel volume sales of beer by wholesalers to retailers.
(2) Contract brewing and beer related includes international shipments of our beers.
The increases in sales to A-B and A-B related in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in volume, higher selling prices for our beers, and a shift in product mix towards bottle and high-end product, both of which carry a higher price per unit. Gross sales in the nine-month period were also favorably impacted by a decrease in the per barrel fee associated with sales to A-B as a result of an amendment to our A-B Distributor Agreement in May 2011. This lower fee level for the period of January 2012 through April 2012 generated approximate savings of $1.2 million as compared to the same period in 2011.
The increase in contract brewing and beer related sales in the nine-month period ended September 30, 2012 compared to the same period of 2011 was due to an increase in shipments under a three-year contract brewing arrangement with FSB, which began production in the first quarter of 2011. The decrease in contract brewing and beer related sales in the three-month period ended September 30, 2012 compared to the same period of 2011 was due to a decrease in shipments under the arrangement with FSB. Executed on October 3, 2012, but effective September 1, 2012, in the best interest of both parties, we mutually agreed with FSB to end our contract brewing arrangement. Under the termination agreement, we will phase out production of FSB branded beers utilizing remaining inventory on-hand. In consideration, FSB will pay us $70,000 per month through September 2013, reduced by an agreed upon margin for any beer delivered to FSB based on the remaining inventory levels. We recorded $57,000 in Sales in September 2012 under the terms of the termination agreement.
Sales to FSB through the contract brewing arrangement, classified in Sales, were as follows (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30, 2012 2011 2012 2011 $ 720 $ 1,213 $ 3,205 $ 2,506
Pubs sales increased in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011, primarily due to increased guest counts and pricing in certain markets. The increases were partially offset by decreases in the number of barrels sold, primarily as a result of a decline in event volume.
The increases in excise taxes in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were due to higher shipments in the 2012 periods compared to the same periods of the prior year.
The increases in volume in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily driven by our increased sales and marketing efforts, timing of programs and new brand and package introductions, partially offset by the termination of our contract brewing agreement with FSB as discussed above and a decline in our event volume, which is included in Pubs.
Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):
Three Months 2012 2011 Increase % Change in
Ended September 30, Shipments Shipments (Decrease) Change Depletions
Widmer Brothers 71,800 73,000 (1,200 ) (1.6 )% (9 )%
Kona 57,100 45,300 11,800 26.0 % 21 %
Redhook 49,000 47,000 2,000 4.3 % 6 %
Total(1) 177,900 165,300 12,600 7.6 % 4 %
Nine Months 2012 2011 Increase % Change in
Ended September 30, Shipments Shipments (Decrease) Change Depletions
Widmer Brothers 199,500 209,600 (10,100 ) (4.8 )% (7 )%
Kona 164,900 135,900 29,000 21.3 % 22 %
Redhook 142,800 136,500 6,300 4.6 % 5 %
Total(1) 507,200 482,000 25,200 5.2 % 5 %
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(1) Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.
The decreases in our Widmer Brothers brand shipments in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to pressure on our Hefeweizen beer which is experiencing competition from large, multi-national wheat beer competitors in the southwestern region. Partially offsetting these decreases has been the positive effect of our focus on the core Widmer Brothers brands including our Rotator IPAs and seasonals, and our high-end offerings, which is fueling broader awareness of the overall Widmer Brothers brand.
The increases in our Kona brand shipments in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were due to the success of our Kona variety packs and the increased velocity of our Kona flagship, Longboard Lager, in existing markets. During the quarter ended September 30, 2012, we launched our Big Wave Golden Ale, previously available only in Hawaii, on the mainland. We continue to successfully introduce our Kona beers to new markets, which has been contributing to the brand's shipment growth. The introduction of our Kona beer in cans in March 2012 also contributed to the increase.
The increases in our Redhook brand shipments in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were the result of our investments in new packaging, brand introductions and marketing initiatives. These investments have resulted in the unique Redhook brand position which we believe is resonating with consumers.
Shipments by Package
The following table sets forth a comparison of our shipments by package,
excluding private label shipments produced under our contract brewing
arrangements (in barrels):
Three Months 2012 2011
Ended September 30, Shipments % of Total Shipments % of Total
Draft 55,200 31.0 % 56,400 34.1 %
Bottle 122,700 69.0 % 108,900 65.9 %
Total 177,900 100.0 % 165,300 100.0 %
Nine Months 2012 2011
Ended September 30, Shipments % of Total Shipments % of Total
Draft 164,600 32.5 % 170,400 35.4 %
Bottle 342,600 67.5 % 311,600 64.6 %
Total 507,200 100.0 % 482,000 100.0 %
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The shift in package mix from draft to bottle in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 was primarily the result of the increase in volumes on our Kona bottle beer and lower volumes on our Hefeweizen draft beer. There is also increased general competition across the industry for on-premise draft sales as the large, multi-national brewers enter the craft beer segment.
Cost of Sales
Cost of sales includes purchased raw materials, direct labor, overhead and
shipping costs.
Information regarding Cost of sales was as follows (dollars in thousands):
Three Months Ended Sept. 30, Dollar
2012 2011 Change % Change
Beer Related $ 25,559 $ 22,729 $ 2,830 12.5 %
Pubs 5,405 5,033 372 7.4 %
Total $ 30,964 $ 27,762 $ 3,202 11.5 %
Nine Months Ended Sept. 30, Dollar
2012 2011 Change % Change
Beer Related $ 73,685 $ 65,106 $ 8,579 13.2 %
Pubs 14,997 13,763 1,234 9.0 %
Total $ 88,682 $ 78,869 $ 9,813 12.4 %
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The increases in Beer Related Cost of sales in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were due to the increase in shipments discussed above, as well as the mix shift from draft to bottle as the per barrel equivalent cost of bottle is more than draft. In addition, increased distribution costs, including offsite storage and fuel, and higher grain prices, primarily barley, contributed to the increases in both the three and nine-month periods.
The increases in Pubs Cost of sales in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to the increases in guest counts noted above, as well as increased labor, food and beverage costs in certain markets.
Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
Three Months Ended Sept. 30, Dollar
2012 2011 Change % Change
Beer Related $ 12,321 $ 11,533 $ 788 6.8 %
Pubs 1,303 1,182 121 10.2 %
Total $ 13,624 $ 12,715 $ 909 7.1 %
Nine Months Ended Sept. 30, Dollar
2012 2011 Change % Change
Beer Related $ 35,679 $ 32,477 $ 3,202 9.9 %
Pubs 2,990 2,924 66 2.3 %
Total $ 38,669 $ 35,401 $ 3,268 9.2 %
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Gross profit as a percentage of Net sales, or gross margin, was as follows:
Three Months Ended
September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Beer Related 32.5 % 33.7 % 32.6 % 33.3 %
Pubs 19.4 % 19.0 % 16.6 % 17.5 %
Total 30.6 % 31.4 % 30.4 % 31.0 %
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The increases in Gross profit in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were due to increases in shipment volumes discussed above, partially offset by declines in beer related and overall gross margin rates. The declines in the beer related gross margin rates were primarily due to higher distribution and grain costs, partially offset by improved brewery performance, increased capacity utilization and a shift in mix to our higher-end beers. The increases in Pubs Gross profit in the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in guest counts and pricing, partially offset by increases in labor, food and beverage costs.
Total approximate capacity utilization is calculated by dividing total shipments by the approximate working capacity and was as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Capacity utilization 84.1 % 79.9 % 81.4 % 76.4 %
During the second quarter of 2012, we added additional fermentation vessels to our breweries which we expect will increase the combined capacity of our production breweries from approximately 900,000 barrels per year to approximately 1.1 million barrels per year when put into service by the end of 2012.
Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") include compensation and related expenses for our sales and marketing activities, management, legal and other professional and administrative support functions.
Three Months Ended Sept. 30, Dollar
2012 2011 Change % Change
$ 11,907 $ 10,530 $ 1,377 13.1 %
As a % of Net sales 26.7 % 26.0 %
Nine Months Ended Sept. 30, Dollar
2012 2011 Change % Change
$ 34,502 $ 30,489 $ 4,013 13.2 %
As a % of Net sales 27.1 % 26.7 %
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The increases in SG&A for the three and nine-month periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increases in labor costs as we expand our national footprint into new geographies and increased costs associated with the launch of our Omission and Big Wave brands. Our investments in sales and marketing are consistent with our strategic focus . . .
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