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BREW > SEC Filings for BREW > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for CRAFT BREW ALLIANCE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CRAFT BREW ALLIANCE, INC.


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.


Index

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

(1) Includes the one-time gain on sale of Fulton Street Brewery, LLC of $6.5 million, net of tax.


Index

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 %

(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 %

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 %


Index

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 %

(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 %

(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.


Index

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 %

(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.


Index

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 %

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 %

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.


Index

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 %

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 %

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.


Index
Information regarding SG&A was as follows (dollars in thousands):

                              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 %

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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