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CEDC > SEC Filings for CEDC > Form 10-Q/A on 19-Nov-2012All Recent SEC Filings

Show all filings for CENTRAL EUROPEAN DISTRIBUTION CORP

Form 10-Q/A for CENTRAL EUROPEAN DISTRIBUTION CORP


19-Nov-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;


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• 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;

• statements relating to shareholder approval of the transaction with Roust Trading and Roust Trading's ability or intention to fund some or all of its investment in the Company; 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/A dated October 4, 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.

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. In Poland, the Company was able to see year on year domestic sales volume and value growth for the quarter ended June 30, 2012 primarily due to the continued success of ?ubrówka Bia?a and the higher margin flavored segment including Soplica. In Russia, although our sales volumes for the first six months were down by 3.3%, sales were flat in the second quarter, following the change of the management team in Russia. Nonetheless, Russia continues to be a challenging environment with excise taxes increasing by 18% in July 2012 (the second increase of the year) and overall difficult consumer market.

Restatement

The Company is restating its unaudited condensed consolidated financial statements for the three and six months period ended June 30, 2012. The Restatement corrects errors caused by a failure to properly account for promotional compensation granted to customers of its main operating subsidiary in Russia, the Russian Alcohol Group ("RAG"), which resulted in excessive write-off for accounts receivable. 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 unaudited 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 June 30, 2012:


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                          Balance sheet rate       Average rate for the
                                 as of              three months ended
                             June 30, 2012            June 30, 2012
              PLN / US$                3.3885                     3.3255
              RUR / US$               32.8981                    31.1085
              HUF / US$              228.9527                   229.3448

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           $459 million                                    $4.6 million gain/loss
USD-Russian ruble          $264 million                                    $2.6 million gain/loss
EUR-Polish zloty           €430 million or approximately $541 million      $5.4 million gain/loss


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Results of Operations:

Three months ended June 30, 2012 compared to three months ended June 30, 2011

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



                                                           Three months ended June 30,
                                                             2012                 2011
                                                          (Restated)
Sales                                                   $      402,750         $  425,838
Excise taxes                                                  (215,549 )         (227,482 )

Net sales                                                      187,201            198,356
Cost of goods sold                                             111,864            123,708

Gross profit                                                    75,337             74,648

Selling, general and administrative expenses                    62,140             63,756

Operating income                                                13,197             10,892

Non operating income / (expense), net
Interest income / (expense), net                               (25,606 )          (28,361 )
Other financial income / (expense), net                        (75,430 )           19,008
Other non operating income / (expense), net                     (2,501 )           (2,661 )

Income / (loss) before taxes and equity in net
income from unconsolidated investments                         (90,340 )           (1,122 )

Income tax expense                                               2,651             (2,211 )

Net loss attributable to the company                           (87,689 )           (3,333 )

Net loss from operations per share of common stock,
basic                                                   $       (1. 15 )       $    (0.05 )
Net loss from operations per share of common stock,
diluted                                                 $        (1.15 )       $    (0.05 )
Other comprehensive income / (loss), net of tax:
Foreign currency translation adjustments                      (40, 193 )           30,428

Comprehensive income / (loss) attributable to the
company                                                 $     (127,882 )       $   27,095

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 decreased by approximately 5.6%, or $11.2 million, from $198.4 million for the three months ended June 30, 2011 to $187.2 million for the three months ended June 30, 2012. This decrease was driven by the impact of foreign exchange translation of $24.9 million partially offset by higher local currency sales revenue of $13.9 million.

                                           Segment Net Sales
                                      Three months ended June 30,
                                       2012                 2011
                Segment
                Poland            $       56,172       $       58,612
                Russia                   125,354              132,191
                Hungary                    5,675                7,553

                Total Net Sales   $      187,201       $      198,356

Sales for Poland decreased by $2.4 million from $58.6 million for the three months ended June 30, 2011 to $56.2 million for the three months ended June 30, 2012. This decrease was mainly a combination of a volume growth of domestic vodkas of 6%, resulting in a net sales value increase of $7.7 million, or 9% in local currency terms, offset by weaker Polish zloty against the U.S. dollar which accounted for approximately $10.1 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.


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Sales for Russia decreased by $6.8 million from $132.2 million for the three months ended June 30, 2011 to $125.4 million for the three months ended June 30, 2012. The sales decline in Russia resulted from the impact of foreign exchange translation of $13.3 million, offset by increased export sales of $1.0 million and domestic sales value increase of $5.5 million. Domestic vodka sales volumes were flat for the quarter however improved pricing and lower trade spend resulted in sales value growth.

Sales for Hungary decreased by $1.9 million from $7.6 million for the three months ended June 30, 2011 to $5.7 million for the three months ended June 30, 2012, which resulted in a $0.4 million decrease in volumes on local currency terms, as well as a weaker Hungarian forint against the U.S. dollar which accounted for approximately $1.5 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit increased by approximately 0.9%, or $0.7 million, to $75.3 million for the three months ended June 30, 2012, from $74.6 million for the three months ended June 30, 2011. The decline in margin was driven primarily by the lower sales value in Russia. Although absolute gross margin declined, gross profit margins as a percentage of net sales increased by 2.9 percentage points from 37.6% to 40.2% for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The improvement in gross margin percentage was driven by a number of factors including improved product and channel mix in Poland and price increases taken in Russia. Part of the improvement in pricing coming from the Russian market was offset by the year on year growth of spirit pricing which resulted in approximately $4.5 million of additional cost in the second quarter 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 decreased by $1.7 million, from $63.8 million for the three months ended June 30, 2011 to $62.1 million for the three months ended June 30, 2012. This decrease was primarily driven by a $7.2 million decrease resulting from weaker local currencies against U.S. dollar, offset by additional legal costs of $4.5 million and redundancy payments of $1.0 million.

The table below sets forth the items of operating expenses.

                                                  Operating Expenses
                                                  Three Months Ended
                                                       June 30,
                                                  2012
                                               (Restated)        2011
                                                   ($ in thousands)
               SG&A                            $    53,037     $ 55,176
               Marketing                             6,817        5,622
               Depreciation and amortization         2,286        2,958

               Total operating expense         $    62,140     $ 63,756

SG&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. SG&A expenses decreased by $2.2 million, from $55.2 million for the three months ended June 30, 2011 to $53.0 million for the three months ended June 30, 2012. The decrease in SG&A expenses results primarily from cost savings achieved on integration of businesses in Russia and Poland and an effect of weaker local currencies against U.S. dollar offset by additional legal costs incurred in the three months ended June 30, 2012 related to the restatement of financial statements of $4.5 million, $1.0 million of redundancy costs in Russia and additional bad debt provision in Russia of $2.1 million.

Depreciation and amortization decreased by $0.7 million, from $3.0 million for the three months ended June 30, 2011 to $2.3 million for the three months ended June 30, 2012.


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Operating Income

Total operating income increased by $2.3 million, from $10.9 million income for the three months ended June 30, 2011 to $13.2 million income for the three months ended June 30, 2012, primarily driven by lower selling, general and administrative expenses in the Russian segment. The table below summarizes the segmental split of operating profit.

                                             Operating Income/(Loss)
                                           Three months ended June 30,
                                           2012                  2011
                                        (Restated)
          Segment
          Poland                       $       9,112         $       8,242
          Russia                               9,050                 3,063
          Hungary                                762                 1,280
          Corporate Overhead
          General corporate overhead          (5,002 )              (1,049 )
          Option Expense                        (725 )                (644 )

          Total operating income       $      13,197         $      10,892

Underlying operating income in Poland increased by approximately 11.0%, or $0.9 million, from $8.2 million for the three months ended June 30, 2011 to $9.1 million for the three months ended June 30, 2012. The operating income in Russia increased by approximately 193.5%, or $6.0 million, from $3.1 million for the three months ended June 30, 2011 to $9.1 million for the three months ended June 30, 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 9.9%, or $2.8 million, from $28.4 million for the three months ended June 30, 2011 to $25.6 million for the three months ended June 30, 2012. This decrease was primarily driven by the euro exchange rate as compared to the Polish zloty.

The Company recognized $77.8 million of non-cash unrealized foreign exchange rate loss in the three months ended June 30, 2012, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $19.3 million of gain in the three months ended June 30, 2011. During three months ended June 30, 2012, the Company recognized $1.3 million gain on debt extinguishment related to repurchased part of Convertible Senior Notes due 2013.

Total other non-operating expenses decreased by $0.2 million, from a loss of $2.7 million for the three months ended June 30, 2011 to a loss of $2.5 million for the three months ended June 30, 2012.

                                                             Three months ended June 30,
                                                            2012                    2011
Factoring costs and bank fees                                  (1,879 )                (1,408 )
Other gains / (losses)                                           (622 )                (1,253 )

Total other non operating income / (expense), net       ($      2,501 )         ($      2,661 )

Income Tax

Our effective tax rate for the three months ended June 30, 2012 was 2.9% as compared to an average blended statutory rate of 21%. The difference between the statutory and effective tax rates was due primarily to permanent tax differences related to valuation allowances recorded against tax loss carry forwards that the Company believes will not be utilized in the future.


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Six months ended June 30, 2012 compared to six months ended June 30, 2011

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

                                                               Six months ended June 30,
                                                               2012
                                                            (Restated)               2011
Sales                                                      $     724,506          $  743,919
Excise taxes                                                    (391,316 )          (407,209 )
Net sales                                                        333,190             336,710
Cost of goods sold                                               202,738             209,393

Gross profit                                                     130,452             127,317

Selling, general and administrative expenses                     121,074             119,126
Gain on remeasurement of previously held equity
interests                                                              0              (7,898 )

Operating income                                                   9,378              16,089

Non operating income / (expense), net
Interest income / (expense), net                                 (51,908 )           (55,213 )
Other financial income / (expense), net                           22,158              49,530
Other non operating income / (expense), net                       (5,099 )            (3,637 )

Income / (loss) before income taxes and equity in net
losses from unconsolidated investments                           (25,471 )             6,769

Income tax benefit / (expense)                                    (2,034 )            (4,190 )
Equity in net losses of affiliates                                     0              (7,946 )

Net loss attributable to the company                             (27,505 )            (5,367 )

Net loss from operations per share of common stock,
basic                                                      $       (0.37 )        $    (0.07 )
Net loss from operations per share of common stock,
diluted                                                    $       (0.37 )        $    (0.07 )
Other comprehensive income / (loss), net of tax:
Foreign currency translation adjustments                        (17, 669 )           164,600

Comprehensive income / (loss) attributable to the
company                                                    $     (45,174 )        $  159,233

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 decreased by approximately 1.0%, or $3.5 million, from $336.7 million for the six months ended June 30, 2011 to $333.2 million for the six months ended June 30, 2012.

The decrease was driven by the impact of foreign exchange translation of $33.1 million, partially offset by the consolidation of Whitehall only for five months in 2011 comparing to full two quarters in 2012 of $6.5 million and higher local currency sales value of $23.1 million. In Russia although sales volumes were lower, this was offset by improved pricing and lower trade marketing spend in the quarter.

Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:

                                         Segment Net Sales Six
                                         months ended June 30,
                                           2012           2011
                     Segment
                     Poland            $    103,307     $ 105,229
                     Russia                 218,780       218,770
                     Hungary                 11,103        12,711

                     Total Net Sales   $    333,190     $ 336,710


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Sales for Poland decreased by $1.9 million from $105.2 million for the six months ended June 30, 2011 to $103.3 million for the six months ended June 30, 2012. This decrease was driven mainly by a weaker Polish zloty against the U.S. dollar which accounted for approximately $15.1 million of sales in U.S. dollar terms offset by higher volume sales of $13.2 million. In 2012, the Company continued to see strong demand for its ?ubrówka Bia?a, as well as higher margin flavored vodkas including Soplica.

Sales for Russia remains stable at $218.8 million for the six months ended June 30, 2012 and for the six months ended June 30, 2011. There was a decline in sales in Russia driven by the weakening of the Russian ruble against the U.S. dollar which accounted for approximately $15.9 million of sales in U.S. dollar terms offset by increased export sales of $1.3 million, domestic sales value increase of $8.1 million and consolidation of Whitehall only for five months in 2011 comparing to two full quarters in 2012 of $6.5 million. Lower sales volumes in Russia during first quarter of 2012 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.

Sales for Hungary decreased by $1.6 million from $12.7 million for the six months ended June 30, 2011 to $11.1 million for the six months ended June 30, 2012 resulting primarily from weakening of the Hungarian forint against the U.S. dollar.

Gross Profit

Total gross profit increased by approximately 2.5%, or $3.2 million, to $130.5 million for the six months ended June 30, 2012, from $127.3 million for the six months ended June 30, 2011. Gross profit margins as a percentage of net sales . . .

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