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BREW > SEC Filings for BREW > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for CRAFT BREW ALLIANCE, INC.

Form 10-Q for CRAFT BREW ALLIANCE, INC.


7-May-2014

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 our 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, 2013 ("2013 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 2013 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.


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Overview

Craft Brew Alliance, Inc. is an independent craft brewing company that was formed through the merger of leading Pacific Northwest craft brewers - Widmer Brothers Brewing and Redhook Ale Brewery - in 2008. Since our formation, we have remained focused on preserving and growing one-of-a-kind craft beers and brands. Today, we are comprised of five unique and pioneering craft beer and cider brands:

· Redhook Ale Brewery founded by Gordon Bowker and Paul Shipman in 1981 in Seattle, Washington;

· Widmer Brothers Brewing 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;

· Omission Beer, internally developed by our brewing team as the first beer brand specially crafted to remove gluten, and launched in 2012 in Portland, Oregon; and

· Square Mile Cider Company, the first non-beer brand family created by Craft Brew Alliance, and launched in 2013.

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 derive from the combination of: i) our innovative portfolio of distinct craft beer and cider brand families; ii) evolving national brewing footprint with national sales and marketing reach; iii) expertise in developing partnerships and new growth strategies; iv) leadership team with significant beer and growth-company expertise; v) proven ability to manage brand lifecycles, from development to turnaround; and vi) successful track record managing mergers, divestitures and acquisitions.

We proudly brew our craft beers in four company-owned breweries located in Portland, Oregon; the Seattle suburb of Woodinville, Washington; Portsmouth, New Hampshire; and Kailua-Kona, Hawaii. Additionally, we own and operate two small innovation breweries, primarily used for small batch production and innovative brews, in Portland, Oregon and Portsmouth, New Hampshire.

We distribute our beers to retailers through independent wholesalers that are aligned with the Anheuser-Busch, LLC ("A-B") network. These sales are made pursuant to a Master Distributor Agreement (the "A-B Distributor Agreement") with A-B. As a result of this distribution arrangement, we believe that, under alcohol beverage laws in a majority of states, these wholesalers would own the exclusive right to distribute our beers in their respective markets if the A-B Distributor Agreement expires or is terminated. Redhook and Widmer Brothers beers are distributed in all 50 states and Kona beers are distributed in 40 states. Omission Beer continues to expand into new markets in the U.S. and internationally. Square Mile is currently available in 10 states in the West. Separate from our A-B wholesalers, we maintain an internal independent sales and marketing organization 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 operations. Beer Related operations include the brewing and sale of craft beers and cider from our six breweries, both domestically and internationally. Pubs operations primarily include our five pubs, four of which are located adjacent to our Beer Related operations, as well as other merchandise sales, and sales of our beers directly to customers.

Following is a summary of our financial results:

                                                    Number of
Three Months Ended       Net            Net          Barrels
    March 31,           Sales           Loss           Sold
       2014         $43.8 million  $(0.2) million      182,800
       2013         $36.6 million  $(1.8) million      155,700


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Results of Operations

The following table sets forth, for the periods indicated, certain information
from our Consolidated Statements of Operations expressed as a percentage of Net
sales(1):

                                                  Three Months Ended March 31,
                                                   2014                  2013
Sales                                                  107.3 %               107.6 %
Less excise tax                                          7.3                   7.6
Net sales                                              100.0                 100.0
Cost of sales                                           73.0                  75.6
Gross profit                                            27.0                  24.4
Selling, general and administrative expenses            27.5                  32.1
Operating loss                                          (0.5 )                (7.7 )
Interest expense                                        (0.2 )                (0.4 )
Interest and other income (expense), net                 0.0                  (0.1 )
Loss before income taxes                                (0.8 )                (8.2 )
Income tax benefit                                      (0.3 )                (3.3 )
Net loss                                                (0.5 )%               (4.8 )%

(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 March 31,
2014            Beer Related         Pubs        Total
Net sales      $       37,814       $ 6,012     $ 43,826
Gross profit   $       11,047       $   793     $ 11,840
Gross margin             29.2 %        13.2 %       27.0 %



2013
Net sales      $ 31,250     $ 5,359     $ 36,609
Gross profit   $  8,326     $   617     $  8,943
Gross margin       26.6 %      11.5 %       24.4 %

Sales by Category
The following table sets forth a comparison of sales by category (dollars in
thousands):

                                              Three Months Ended March 31,          Dollar
Sales by Category                               2014                 2013           Change        % Change
A-B and A-B related                        $       37,852       $       31,862     $   5,990           18.8 %
Contract brewing and beer related(1)                3,153                2,160           993           46.0 %
Excise taxes                                       (3,191 )             (2,772 )        (419 )         15.1 %
Net beer related sales                             37,814               31,250         6,564           21.0 %
Pubs(2)                                             6,012                5,359           653           12.2 %
Net sales                                  $       43,826       $       36,609     $   7,217           19.7 %

(1) Beer related includes international beer sales.

(2) Pubs sales include sales of promotional merchandise and sales of beer directly to customers.


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Shipments by Category
Shipments by category were as follows (in barrels):

            Three Months                  2014           2013                                %             Change in
          Ended March 31,              Shipments      Shipments       Barrel Change        Change        Depletions(1)
A-B and A-B related                       167,300        144,800              22,500           15.5 %                 8 %
Contract brewing and beer related(2)       13,100          8,500               4,600           54.1 %
Pubs                                        2,400          2,400                   -              -
Total                                     182,800        155,700              27,100           17.4 %

(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 increase in sales to A-B and A-B related in the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the increase in shipments, a shift in package mix towards bottle, which has a higher selling price per barrel than draft, and price increases.

The increase in contract brewing and beer related sales in the three­­month period ended March 31, 2014 compared to the same period of 2013 was primarily due to an increase in international shipments of our beers, which sell at a higher rate per barrel than contract brewing sales, as well as an increase in contract brewing shipments.

Pubs sales increased in the three-month period ended March 31, 2014 compared to the same period of 2013, primarily a result of our Kona Pubs in Hawaii and our Redhook Pub in Woodinville, Washington experiencing increased sales as a result of higher guest counts. The Redhook Pub in Woodinville, Washington was closed for four weeks during the three-month period ended March 31, 2013 for a full remodel and re-opened at the end of May 2013 after being closed for twelve weeks in total.

The increase in excise taxes in the three-month period ended March 31, 2014 compared to the same period of 2013 was due to the increase in shipments.

Shipments by Brand
The following table sets forth a comparison of shipments by brand (in barrels):

 Three Months        2014           2013                         %         Change in
Ended March 31,   Shipments      Shipments      Increase      Change       Depletions
Kona                  63,800         51,800        12,000        23.2 %             11 %
Widmer Brothers       57,800         51,400         6,400        12.5 %             (1 )%
Redhook               50,600         45,000         5,600        12.4 %             15 %
Total(1)             172,200        148,200        24,000        16.2 %              8 %

(1) Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.

The increase in our Kona brand shipments in the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the continued sales growth of our Longboard Lager and Big Wave Golden Ale.

The increase in our Widmer Brothers brand shipments in the three­month period ended March 31, 2014 compared to the same period of 2013 was primarily due to increases in shipments of Omission beer and Upheaval IPA, a new brand for Widmer Brothers, partially offset by a decline in sales of Hefeweizen.

The increase in our Redhook brand shipments in the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily the result of our new KCCO Black Lager, a craft beer developed in partnership with theChive, the world's largest photo entertainment website, as well as further penetration into existing markets, particularly by our Long Hammer IPA, as well as Game Changer Ale, which was co-developed with Buffalo Wild Wings.


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The difference between the percentage change in shipments and percentage change in depletions for the three-month period ended March 31, 2014 compared to the same period of 2013 was a result of continuing the optimization of our supply chain processes, including brewing, to more closely align with the seasonality of our beer sales.

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 Ended              2014                            2013
    March 31,        Shipments       % of Total      Shipments       % of Total
Draft                    45,300             26.3 %       47,300             31.9 %
Packaged                126,900             73.7 %      100,900             68.1 %
Total                   172,200            100.0 %      148,200            100.0 %

The shift in package mix from draft to packaged in the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily the result of the increases in volumes on our Kona, Omission and Redhook packaged beers and lower volumes on our Widmer Brothers draft beer. Increased competition across the industry, as a result of both the entry of large, multi-national brewers into the craft beer segment and the significant increase in small, local breweries nationally, is putting pressure on on­premise draft sales.

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 March 31,         Dollar
                    2014                 2013          Change       % Change
Beer Related   $       26,767       $       22,924     $ 3,843           16.8 %
Pubs                    5,219                4,742         477           10.1 %
Total          $       31,986       $       27,666     $ 4,320           15.6 %

The increase in Beer Related Cost of sales in the three­month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the increase in shipments discussed above, as well as the mix shift from draft to packaged product as the per barrel equivalent cost of packaged is higher than draft. These cost increases were partially offset by increased efficiencies, primarily through better capacity utilization, of our breweries.

Pubs Cost of sales increased in the three-month period ended March 31, 2014 compared to the same period of 2013 primarily due to the increase in sales and cost increases across various categories, including labor, merchandise and administrative costs.

Capacity utilization is calculated by dividing total shipments by approximate working capacity and was as follows:

Three Months Ended March 31, 2014 2013 Capacity utilization 68.0 % 57.9 %


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Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):

                 Three Months Ended
                      March 31,            Dollar
                  2014          2013       Change       % Change
Beer Related   $    11,047     $ 8,326     $ 2,721           32.7 %
Pubs                   793         617         176           28.5 %
Total          $    11,840     $ 8,943     $ 2,897           32.4 %

The increase in gross profit in the three­month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the increase in shipment volumes and the improved operating efficiencies of our breweries discussed above.

Gross profit as a percentage of net sales, or gross margin, was as follows:

Three Months Ended March 31,

                    2014                   2013
Beer Related             29.2 %                 26.6 %
Pubs                     13.2 %                 11.5 %
Overall                  27.0 %                 24.4 %

The increase in the Beer Related gross margin rate in the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the improved operating efficiencies of our breweries as a result of better capacity utilization, as discussed above. The increase in the Pubs gross margin rate in the three-month period ended March 31, 2014 was primarily due to the 2013 closure and post­renovation ramp­up of our Woodinville, Washington Pub, as discussed above.

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.

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

Three Months Ended

                             March 31,             Dollar
                         2014          2013        Change      % Change
                      $   12,062     $ 11,760     $    302           2.6 %
As a % of Net sales         27.5 %       32.1 %

The increase in SG&A for the three-month period ended March 31, 2014 compared to the same period of 2013 was primarily due to the timing of certain promotional activity spending and the planned increase in SG&A spending for 2014 when compared to 2013. SG&A decreased as a percentage of Net sales in the three­month period ended March 31, 2014 compared to the same period of 2013 primarily due to the increase in our Net sales.


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Interest Expense
Information regarding Interest expense was as follows (dollars in thousands):

   Three Months Ended
        March 31,              Dollar
  2014            2013         Change       % Change
$     101       $     156     $    (55 )        (35.3 )%



                              Three Months Ended March 31,
                                2014                 2013
Average debt outstanding   $       11,667       $       13,000
Average interest rate                2.06 %               1.91 %

The decrease in Interest expense in the three-month period ended March 31, 2014 compared to the same period of 2013 was due to lower average outstanding borrowings.

Income Tax Provision
Our effective income tax rate was 38.9% for the first three months of 2014 and 40.8% in the first three months of 2013. The effective income tax rates reflect the impact of non-deductible expenses, primarily state and local taxes, meals and entertainment expenses and tax credits.

Liquidity and Capital Resources

We have required capital primarily for the construction and development of our production breweries, to support our expansion and growth plans and to fund our working capital needs. Historically, we have financed our capital requirements through cash flows from operations, bank borrowings and the sale of common and preferred stock. We anticipate meeting our obligations for the twelve months beginning April 1, 2014 primarily from cash flows generated from operations. In addition, we may borrow under our line of credit facility as the need arises. Capital resources available to us at March 31, 2014 included $2.9 million of Cash and cash equivalents and $22 million available under our line of credit facility.

We had $6.4 million of working capital and our debt as a percentage of total capitalization (total debt and common shareholders' equity) was 9.4% at March 31, 2014.

A summary of our cash flow information was as follows (dollars in thousands):

                                                          Three Months Ended
                                                               March 31,
                                                           2014          2013
Cash flows provided by (used in) operating activities   $    2,533     $ (1,317 )
Cash flows used in investing activities                     (2,352 )     (1,902 )
Cash flows used in financing activities                        (13 )        (69 )
Increase (decrease) in Cash and cash equivalents        $      168     $ (3,288 )

Cash provided by operating activities of $2.5 million in the first three months of 2014 resulted from our Net loss of $(0.2) million, net non-cash expenses of $1.6 million and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, decreased $0.4 million to $11.0 million at March 31, 2014 compared to $11.4 million at December 31, 2013. This decrease was primarily due to a $0.5 million decrease in our receivable from A-B, which totaled $8.0 million at March 31, 2014. Historically, we have not had collection problems related to our accounts receivable.


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Inventories increased $1.9 million to $18.5 million at March 31, 2014 compared to $16.6 million at December 31, 2013, primarily to support an expected increase in shipment volume in the quarter ending June 30, 2014.

Accounts payable increased $2.0 million to $16.7 million at March 31, 2014 compared to $14.7 million at December 31, 2013, primarily due to increased inventory purchases to support our expected increased level of sales.

As of March 31, 2014, we had the following net operating loss carryforwards ("NOLs") and federal credit carry forwards available to offset payment of future income taxes:

· state NOLs of $41,000, tax-effected; and

· federal alternative minimum tax ("AMT") credit carry forwards of $408,000.

We anticipate that we will utilize the remaining NOLs and federal credit carry forwards in the near future and, accordingly, once utilized, we will be required to satisfy all of our income tax obligations with cash.

Capital expenditures of $2.5 million in the first three months of 2014 were primarily directed to beer production capacity and efficiency improvements and Pubs remodeling. As of March 31, 2014 we had $0.5 million of the $2.5 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to $0.3 million of capital expenditures recorded in Accounts payable at December 31, 2013. We anticipate capital expenditures of approximately $15 million to $20 million in 2014 primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail.

We have a loan agreement (as amended, the "Loan Agreement") with Bank of America, N.A., which is presently comprised of a $22.0 million revolving line of credit ("Line of Credit"), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and an $10.7 million term loan ("Term Loan"). We may draw upon the Line of Credit for working capital and general corporate purposes. At March 31, 2014, we had no borrowings outstanding under the Line of Credit and we were in compliance with the financial covenants associated with the Loan Agreement.

Critical Accounting Policies and Estimates

Our financial statements are based upon the selection and application of significant accounting policies that require management to make significant estimates and assumptions. Judgments and uncertainties affecting the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. Our estimates are based upon historical experience, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances at various points in time. Actual results may differ, potentially significantly, from these estimates.

Our critical accounting policies, as described in our 2013 Annual Report, relate to goodwill, indefinite-lived intangible assets, long-lived assets, refundable deposits on kegs, revenue recognition and deferred taxes. There have been no changes to our critical accounting policies since December 31, 2013.

Seasonality

Our sales generally reflect a degree of seasonality, with the first and fourth quarters historically exhibiting low sales levels compared to the second and third quarters. Accordingly, our results for any particular quarter are not likely to be indicative of the results to be achieved for the full year.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.


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Recent Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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