Overview
Our distinctive portfolio combines the power ofKona Brewing Co. , one of the top craft beer brands in the world, with strong regional breweries and innovative lifestyle brands,Appalachian Mountain Brewery , Cisco Brewers,Omission Brewing Co. ,Redhook Brewery ,Square Mile Cider Co. , Widmer Brothers Brewing, andWynwood Brewing Co. We nurture the growth and development of our brands in today's increasingly competitive beer market through our state-of-the-art brewing and distribution capability, integrated sales and marketing infrastructure, and strong focus on innovation, local community and sustainability. CBA was formed in 2008 through the merger ofRedhook Brewery and Widmer Brothers Brewing, the two largest craft brewing pioneers in the Northwest at the time. Following a successful strategic brewing and distribution partnership,Kona Brewing Co. joined CBA in 2010. As part of CBA, Kona has expanded its reach across all 50 U.S. states and approximately 30 countries, while remaining deeply rooted in its home ofHawaii . As consumers increasingly seek more variety and more local offerings,Craft Brew Alliance has expanded its portfolio and home markets with strong regional craft beer brands in targeted markets. In 2015 and 2016, we formed strategic partnerships withAppalachian Mountain Brewery , based inBoone, North Carolina ; Cisco Brewers, based inNantucket, Massachusetts ; andWynwood Brewing Co. , based in the heart ofMiami's vibrant multicultural arts district. Building on the success of these partnerships, we acquired all three brands in the fourth quarter of 2018, fundamentally transforming our footprint and paving the way to increase our investments in their growth and drive shareholder value. We proudly brew and package our craft beers in three company-owned production breweries located inPortland, Oregon ;Portsmouth, New Hampshire ; andKailua-Kona, Hawaii . In 2019, we continued to leverage our contract brewing agreement withA-B Commercial Strategies, LLC ("ABCS"), an affiliate ofAnheuser-Busch, LLC ("A-B"), through which we brew select CBA brands in A-B'sFort Collins, Colorado brewery. Additionally, we own and operate five innovation breweries inPortland, Oregon ;Seattle, Washington ;Portsmouth, New Hampshire ;Boone, North Carolina ; andMiami, Florida , which are primarily used for small-batch production and limited-release beers offered primarily in our brewpubs and brands' home markets. We distribute our beers to retailers through wholesalers that are aligned with the A-B network. These sales are made pursuant to a Master Distributor Agreement (the "A-B Distributor Agreement") with A-B, which extends through 2028. 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. As competition puts increasing pressure on craft brands outside of their home markets, we invested in accelerating Kona's growth through our first-ever national marketing campaign, expanded distribution of our newly acquired brandsAppalachian Mountain Brewery , Cisco Brewers, andWynwood Brewing Co. across their respective home markets ofNorth Carolina ,New England , andSouth Miami , and continued our efforts to stabilize and strengthen Widmer Brothers and Redhook in thePacific Northwest , which is a mature craft beer market.
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.
OnNovember 11, 2019 , we jointly announced withAnheuser-Busch Companies, LLC ("ABC") an agreement to expand our partnership, withABC agreeing to purchase our remaining shares it does not currently own in a merger transaction for$16.50 per share, in cash.ABC was formed in 1979 as the holding company of A-B. The transaction represents an exciting next step in a long and successful partnership between the two companies that traces back over 25 years. The transaction is subject to customary closing conditions, including approval by a majority of our shareholders not affiliated withABC and certain regulatory approvals. For additional information about the merger transaction, see "Agreement and Plan of Merger" on page 11 of this report. We operate in two segments: Beer Related operations and Brewpubs operations. Beer Related operations include the brewing, and domestic and international sales, of craft beers and ciders from our breweries. Brewpubs operations primarily include our five brewpubs, 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. 28
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Publicly traded on NASDAQ under the ticker symbol BREW,Craft Brew Alliance is headquartered inPortland, Oregon and operates breweries and brewpubs across theU.S. For more information about CBA and its brands, see "Available Information" on page 16 of this report.
Following is a summary of our financial results:
Number of Net Sales Net Income (Loss) Barrels Sold 2019$193.0 million $(12.9) million 733,700 2018$206.2 million $4.1 million 747,600 2017$207.5 million $9.5 million 748,300
Agreements with
OnNovember 11, 2019 , we entered into the Merger Agreement withABC and Merger Sub, pursuant to which Merger Sub will be merged with and into CBA, with CBA continuing as the surviving entity in the Merger as a direct subsidiary ofABC . See "Relationship withAnheuser-Busch, LLC " in Item 1. Business in this report for additional information regarding the Merger. The Master A-B Distributor Agreement (the "A-B Distributor Agreement"), as amended inAugust 2016 , provides for the distribution of our brands in all states, territories and possessions ofthe United States , including theDistrict of Columbia and, except with respect to Kona beers, allU.S. military, diplomatic, and governmental installations in aU.S. territory or possession. Under the A-B Distributor Agreement, we have granted A-B the right of first refusal to distribute our products, including any internally developed new products, but excluding new products that we may acquire. We are responsible for marketing our products to A-B's wholesalers, as well as to retailers and consumers. As amended inAugust 2016 , the term of the A-B Distributor Agreement will expire onDecember 31, 2028 , unless terminated earlier as a result of the Merger or otherwise. The A-B Distributor Agreement is also subject to immediate termination, by either party, upon the occurrence of standard events of default as defined in the agreement. Additionally, the A-B Distributor Agreement may be terminated by A-B, with six months' prior written notice to us, upon the occurrence of any of the following events:
• we engage in incompatible conduct that damages the reputation or image of
AB or the brewing industry; • any A-B competitor or affiliate thereof acquires 10% or more of our outstanding equity securities, and that entity designates one or more persons to our board of directors;
• our current chief executive officer ceases to function in that role or is
terminated, and a satisfactory successor, in AB's opinion, is not appointed
within six months;
• we are merged or consolidated into or with any other entity or any other
entity merges or consolidates into or with us without A-B's prior approval;
or • A-B, its subsidiaries, affiliates, or parent, incur any obligation or
expense as a result of a claim asserted against them by or in our name, or
by our affiliates or shareholders, and we do not reimburse and indemnify A-B
and its corporate affiliates on demand for the entire amount of the obligation or expense.
Under the A-B Distributor Agreement, we pay
OnAugust 23, 2016 , we also entered into a Contract Brewing Agreement (the "Brewing Agreement") with ABCS, an affiliate of A-B, pursuant to which ABCS has agreed to brew, bottle and package up to 300,000 barrels of our mutually agreed products annually, in facilities owned by ABCS withinthe United States , for an initial term throughDecember 31, 2026 . Production began in ABCS'sFort Collins, Colorado brewery in the second quarter of 2017. 29
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InDecember 2015 , we partnered with Ambev, the Brazilian subsidiary ofAnheuser-Busch InBev SA , to distribute Kona beers inBrazil . OnAugust 23, 2016 , we also entered into an International Distribution Agreement (the "International Distribution Agreement") withAnheuser-Busch Worldwide Investments, LLC ("ABWI"), an affiliate of A-B, pursuant to which ABWI is our sole and exclusive distributor of our malt beverage products in jurisdictions outsidethe United States , subject to the terms and conditions of our agreement with our other international distributor,CraftCan Travel LLC , and certain other limitations, in each case as set forth in the International Distribution Agreement. Unless terminated sooner, including upon completion of the Merger, the International Distribution Agreement will continue in effect untilDecember 31, 2026 . OnJanuary 30, 2018 , we entered into a Contract Brewing Agreement withABC , pursuant to which we have agreed to brew, package, and palletize certain malt beverage products of A-B's craft breweries at ourPortland, Oregon , andPortsmouth, New Hampshire , breweries as selected byABC . Under the terms of this agreement,ABC paid us a per barrel fee that varies based on the annual volume of the specified product brewed by us, plus (a) our actual incremental costs of brewing the product, and (b) certain capital costs and costs of graphics and labeling that we incur in connection with the brewed products. The agreement expired onDecember 31, 2019 .
For additional information, see Note 20 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report.
Sale ofWoodinville Brewery See Notes 21 and 22 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for a discussion of the termination of our agreements withPabst Brewing Company, LLC , andPabst Northwest Brewing Company, LLC (collectively, "Pabst"), the determination in 2017 to classify ourWoodinville Brewery assets as held for sale and a$0.5 million impairment charge recorded related to the assets held for sale. The sale was completed in early 2018 and, when settled, resulted in a$0.5 million gain on sale of assets.
Results of Operations
The following table sets forth, for the periods indicated, certain information from our Consolidated Statements of Operations expressed as a percentage of Net sales(1): Year Ended December 31, 2019 2018 2017 Sales 106.0 % 105.4 % 105.8 % Less excise tax 6.0 5.4 5.8 Net sales 100.0 100.0 100.0 Cost of sales 67.4 66.9 68.5 Gross profit 32.6 33.1 31.5
Selling, general and administrative expenses 42.0 30.3 29.1 Operating income (loss)
(9.4 ) 2.8 2.3 Interest expense (1.0 ) (0.3 ) (0.3 ) Other income, net 0.2 0.1 - Income (loss) before income taxes (10.2 ) 2.6 1.9 Income tax provision (benefit) (3.5 ) 0.6 (2.6 ) Net income (loss) (6.7 )% 2.0 % 4.6 %
(1) Percentages may not sum due to rounding.
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Segment Information Net sales, Gross profit and Gross margin information by segment was as follows (dollars in thousands): Year Ended December 31, 2019 Beer Related Brewpubs Total Net sales$ 169,275 $ 23,696 $ 192,971 Gross profit$ 60,601 $ 2,248 $ 62,849 Gross margin 35.8 % 9.5 % 32.6 % 2018 Net sales$ 182,163 $ 24,023 $ 206,186 Gross profit$ 66,958 $ 1,365 $ 68,323 Gross margin 36.8 % 5.7 % 33.1 % 2017 Net sales$ 179,830 $ 27,626 $ 207,456 Gross profit$ 63,412 $ 1,846 $ 65,258 Gross margin 35.3 % 6.7 % 31.5 %Net Sales by Category The following tables set forth a comparison of Net sales by category (dollars in thousands): Year Ended December 31, Dollar Sales by Category 2019 2018 Change % Change A-B and A-B related(1)$ 163,612 $ 167,638 $ (4,026 ) (2.4 )% Contract brewing and beer related(2) 17,326 25,608 (8,282 ) (32.3 )% Excise taxes (11,663 ) (11,083 ) (580 ) 5.2 % Net beer related sales 169,275 182,163 (12,888 ) (7.1 )% Brewpubs(3) 23,696 24,023 (327 ) (1.4 )% Net sales$ 192,971 $ 206,186 $ (13,215 ) (6.4 )% Year Ended December 31, Dollar Sales by Category 2018 2017 Change % Change A-B and A-B related(1)$ 167,638 $ 164,491 $ 3,147 1.9 % Contract brewing and beer related(2) 25,608 27,430 (1,822 ) (6.6 )% Excise taxes (11,083 ) (12,091 ) 1,008 (8.3 )% Net beer related sales 182,163 179,830 2,333 1.3 % Brewpubs(3) 24,023 27,626 (3,603 ) (13.0 )% Net sales$ 206,186 $ 207,456 $ (1,270 ) (0.6 )%
(1) A-B and A-B related includes domestic and international sales of our owned
brands sold through A-B and Ambev, non-owned brands sold pursuant to master
distribution agreements, contract brewing fees earned from
2018, international distribution fees earned from ABWI and the sale of hops
to A-B.
(2) Beer related includes international and domestic beer sales not sold through
A-B or Ambev, as well as fees earned through alternating proprietorship
agreements which ceased in the fourth quarter of 2018.
(3) Brewpubs sales include sales of promotional merchandise and sales of beer directly to customers. 31
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Shipments by Category Shipments by category were as follows (in barrels): Increase % Change in
Year Ended
Change Depletions(1) A-B and A-B related(2) 645,400 653,300 (7,900 ) (1.2 )% (1 )% Contract brewing and beer related(3) 80,800 86,700 (5,900 ) (6.8 )% Brewpubs 7,500 7,600 (100 ) (1.3 )% Total 733,700 747,600 (13,900 ) (1.9 )% Increase % Change in
Year Ended
Change Depletions(1) A-B and A-B related(2) 653,300 654,200 (900 ) (0.1 )% (2 )% Contract brewing and beer related(3) 86,700 84,800 1,900 2.2 % Brewpubs 7,600 9,300 (1,700 ) (18.3 )% Total 747,600 748,300 (700 ) (0.1 )%
(1) Change in depletions reflects the year-over-year change in barrel volume
sales of beer by our wholesalers to retailers.
(2) A-B and A-B related includes domestic and international shipments of our
owned brands distributed through A-B and Ambev, non-owned brands distributed
pursuant to master distribution agreements and contract brewing volume
produced for
(3) Beer related includes domestic and international shipments of our beers not
distributed through A-B or Ambev.
The decrease in sales to A-B and A-B related in 2019 compared to 2018 was primarily due to increased promotional programming on owned brands, as well as decreases in A-B contract brew shipments, partially offset by increases in average unit pricing. International distribution fees earned were$3.2 million in 2019 compared to$3.4 million in 2018.
The increase in sales to A-B and A-B related in 2018 compared to 2017 was primarily due to an increase in average unit pricing, contract brewing fees earned and the sale of hops, partially offset by unfavorable brand family mix.
The average gross revenue per barrel, excluding excise taxes and net of discounting, on shipments of beer through the A-B distribution network was relatively flat in 2019 compared to 2018, primarily due to pricing increases, partially offset by increases in promotional programming.
The average gross revenue per barrel, excluding excise taxes and net of discounting, on shipments of beer through the A-B distribution network increased by 1.4% in 2018 compared to 2017, primarily due to pricing increases, partially offset by shifts in brand family mix. Price changes implemented by us have generally followed craft beer market pricing trends.
During 2019, 2018 and 2017, we sold 88.0%, 87.4% and 87.4%, respectively, of our beer through A-B at wholesale pricing levels.
The decrease in contract brewing and beer related sales in 2019 compared to 2018 was primarily due to no longer receiving alternating proprietorship fees as a result of the acquisitions of Appalachian Mountain Brewing, Cisco Brewers and Wynwood Brewing in late 2018, as well as decreases in contract brewing shipment volumes, partially offset by sales of our newly acquired brands distributed outside the A-B distribution network. International shipment volumes decreased in 2019 compared to 2018. The decrease in contract brewing and beer related sales in 2018 compared to 2017 was primarily due to$3.4 million of non-recurring fees earned in the 2018 period fromPabst Northwest Brewing Company ("Pabst") related to a contract brewing volume shortfall and termination fees, partially offset by an increase in international shipments of our beers not distributed through A-B or Ambev and an increase in our alternating proprietorship fees. As a result of our asset purchase of Cisco and acquisitions of AMB and Wynwood, we no longer have alternating proprietorship agreements as of the respective asset purchase and acquisition dates. We expected this to have an unfavorable impact on our 2019 and future Contract brewing and beer related sales. Brewpubs sales decreased slightly in 2019 compared to 2018 primarily due to ceasing operations at ourPortsmouth brewpub and leasing it to the founders of Cisco, which occurred at the beginning ofApril 2019 , as well as the closure of thePortland taproom, which occurred at the end ofJanuary 2019 , partially offset by the inclusion of the results of our newly acquired AMB and Wynwood brewpub operations. 32
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Brewpubs sales decreased in 2018 compared to 2017, primarily as a result of the closure of ourWoodinville brewpub which occurred at the end of 2017, partially offset by increased sales at our Kona brewpub on the big island ofKailua-Kona inHawaii and our Redhook Brewlab being operational for a full year. Excise taxes vary directly with the volume of beer shipped. Additionally, beginningJanuary 1, 2018 , the federal excise taxes imposed on domestic brewers, such as us, that produce less than 2 million barrels annually, were reduced from$7.00 to$3.50 per barrel on the first 60,000 barrels shipped annually and from$18.00 to$16.00 per barrel on the first 6 million barrels shipped annually for all other brewers and all beer importers. Also, while the existing excise tax on hard cider did not change, the small producer tax credit for hard cider was expanded. Producers like us, who produce between 130,000 and 750,000 gallons of hard cider annually, receive a$0.033 credit for an effective tax rate of$0.193 per gallon.
Shipments by Brand The following table sets forth a comparison of shipments by brand (in barrels):
Increase % Change in
Year Ended
Change Depletions Kona 474,800 456,300 18,500 4.1 % 4 % Widmer Brothers 91,000 98,700 (7,700 ) (7.8 )% (11 )% Redhook 61,000 71,200 (10,200 ) (14.3 )% (16 )% Omission 42,200 44,700 (2,500 ) (5.6 )% (5 )% All other(1) 52,900 48,500 4,400 9.1 % 4 % Total(2) 721,900 719,400 2,500 0.3 % (1 )% Increase % Change in
Year Ended
Change Depletions Kona 456,300 424,600 31,700 7.5 % 8 % Widmer Brothers 98,700 123,300 (24,600 ) (20.0 )% (19 )% Redhook 71,200 94,200 (23,000 ) (24.4 )% (27 )% Omission 44,700 44,000 700 1.6 % - % All other(1) 48,500 44,500 4,000 9.0 % 12 % Total(2) 719,400 730,600 (11,200 ) (1.5 )% (2 )%
(1) All other includes the shipments and depletions from our Appalachian Mountain
Brewing, Cisco Brewers, Square Mile, and Wynwood Brewing brand families.
(2) Total shipments by brand include international shipments and exclude
shipments that we produced for others under our contract brewing arrangements. The increase in our Kona brand shipments in 2019 compared to 2018 was due to increases in domestic shipments, primarily led by demand for Big Wave Golden Ale and Gold Cliff IPA, partially offset by declines in Hanalei Island IPA and Kanaha Blonde Ale.
The increase in our Kona brand shipments in 2018 compared to 2017 was due to increases in both in domestic and international shipments, primarily led by demand for Big Wave Golden Ale and Kanaha Blonde Ale, partially offset by a decline in Longboard Lager.
The decrease in our Widmer Brothers brand shipments in 2019 compared to 2018 was led by a decrease in Hefeweizen brand shipments.
The decrease in our Widmer Brothers brand shipments in 2018 compared to 2017 was led by a decrease in Hefeweizen brand shipments, primarily due to a continued strategic focus on the home market ofOregon , partially offset by the release of Green and Gold Kolsch and Deadlift IPA.
The decrease in our Redhook brand shipments in 2019 compared to 2018 was primarily due to decreases in Longhammer IPA, Brewers Choice Variety Pack, and ESB brand shipments, partially offset by increases in Big Ballard IPA shipments.
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The decrease in our Redhook brand shipments in 2018 compared to 2017 was primarily due to a continued strategic focus on the home market ofWashington , led by a decline in Longhammer IPA and ESB brand shipments, partially offset by an increase in Big Ballard IPA.
The decrease in our Omission brand shipments in 2019 compared to 2018 was primarily due to decreases in shipments of the Pale Ale, Lager and IPA brands, partially offset by shipments of our newly released seltzer and increased shipments in the Ultimate Light brand.
The slight increase in our Omission brand shipments in 2018 compared to 2017 was primarily led by increased demand for Omission Ultimate Light brand, offset by a decrease in our Pale Ale and Lager brands. The increase in our All other shipments in 2019 compared to 2018 was primarily due to increases in shipments of our Wynwood and AMB brands, partially offset by a decrease in shipments of Cisco brands, all acquired in the fourth quarter of 2018. The increase in our All other shipments in 2018 compared to 2017 was primarily due to an increase in shipment volumes related to our distribution agreements with Wynwood Brewing and Appalachian Mountain Brewing. During the fourth quarter of 2018, the distribution agreements with Wynwood Brewing and Appalachian Mountain Brewing terminated when their shipments began being treated as owned.
Shipments by Package The following table sets forth a comparison of our shipments by package, excluding contract brewing shipments produced under our contract brewing arrangements (in barrels):
Year Ended 2019 2018 2017 December 31, Shipments % of Total Shipments % of Total Shipments % of Total Draft 164,400 22.8 % 169,200 23.5 % 165,600 22.7 % Packaged 557,500 77.2 % 550,200 76.5 % 565,000 77.3 % Total 721,900 100.0 % 719,400 100.0 % 730,600 100.0 %
The package mix was relatively consistent through the three-year period.
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):
Year Ended December 31, Dollar 2019 2018 Change % Change Beer Related$ 108,674 $ 115,205 $ (6,531 ) (5.7 )% Brewpubs 21,448 22,658 (1,210 ) (5.3 )% Total$ 130,122 $ 137,863 $ (7,741 ) (5.6 )% Year Ended December 31, Dollar 2018 2017 Change % Change Beer Related$ 115,205 $ 116,418 $ (1,213 ) (1.0 )% Brewpubs 22,658 25,780 (3,122 ) (12.1 )% Total$ 137,863 $ 142,198 $ (4,335 ) (3.0 )% The decrease in Beer Related Cost of sales in 2019 compared to 2018 was primarily due to decreases in Beer Related Cost of sales on a per barrel basis. The decreases in our Beer Related Cost of sales on a per barrel basis was primarily due to cost savings related to no longer having alternating proprietorship material costs as a result of the acquisitions of the AMB, Cisco and Wynwood brands in the fourth quarter of 2018, as well as the lower cost of having a portion of our beer produced by A-B in itsFort Collins, Colorado brewery. These decreases were partially offset by increases in brewery costs on a per barrel basis due to higher fixed overhead related to our newly acquired breweries inBoone, North Carolina andMiami, Florida .
The decrease in Beer Related Cost of sales in 2018 compared to 2017 was primarily due to a decrease in Beer Related Cost of sales on a per barrel basis. The decrease in our Beer Related Cost of sales on a per barrel basis was primarily due to the lower cost
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of having a portion of our beer produced by A-B in itsFort Collins, Colorado brewery, as well as cost savings associated with removing theWoodinville facility from our brewing footprint and the termination of our contract brewing agreement inMemphis , which had higher costs on a per barrel basis. The decreases were partially offset by increases in brewery costs due to higher fixed overhead, distribution rates on a per barrel basis and an increase in the quantity of hops shipped from our inventory. As a result of our asset purchase of Cisco and acquisitions of AMB and Wynwood we no longer have alternating proprietorship agreements. We expected this to have a favorable impact on our 2019 and future Beer Related Cost of sales.
Brewpubs Cost of sales decreased in 2019 compared to 2018 primarily due to
ceasing operations and leasing of our
Brewpubs Cost of sales increased in 2018 compared to 2017 primarily due to
closure of the
Capacity Utilization Capacity utilization is calculated by dividing total shipments from our owned breweries by approximate working capacity of those breweries and was as follows: Year Ended December 31, 2019 2018 2017 Capacity utilization 53 % 57 % 60 % Our capacity utilization declined in 2019 compared to 2018 and 2018 compared to 2017 due to a larger percentage of our beer being brewed by ABCS as part of our contract brewing relationship and evolving brewery footprint. As discussed in Notes 21 and 22 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report, we ceased production at ourWoodinville, Washington brewery during the second quarter of 2017, which reduced the capacity of our owned breweries beginning in the third quarter of 2017. As a result, beginning with the third quarter of 2017, our capacity utilization calculation was revised to exclude, from the denominator, the production capacity of ourWoodinville, Washington brewery, which we estimated to be approximately 220,000 barrels per year. Gross Profit Information regarding Gross profit was as follows (dollars in thousands): Year Ended December 31, Dollar 2019 2018 Change % Change Beer Related$ 60,601 $ 66,958 $ (6,357 ) (9.5 )% Brewpubs 2,248 1,365 883 64.7 % Total$ 62,849 $ 68,323 $ (5,474 ) (8.0 )% Year Ended December 31, Dollar 2018 2017 Change % Change Beer Related$ 66,958 $ 63,412 $ 3,546 5.6 % Brewpubs 1,365 1,846 (481 ) (26.1 )% Total$ 68,323 $ 65,258 $ 3,065 4.7 % Gross profit as a percentage of Net sales, or gross margin rate, was as follows: Year Ended December 31, 2019 2018 2017 Beer Related 35.8 % 36.8 % 35.3 % Brewpubs 9.5 % 5.7 % 6.7 % Total 32.6 % 33.1 % 31.5 %
The deceases in Beer Related Gross profit and gross margin in 2019 compared to 2018 were primarily due to incremental promotional pricing, decreases in shipment volume and increases in brewery costs due to higher fixed overhead related to our newly acquired
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breweries inBoone, North Carolina andMiami, Florida , partially offset by cost savings related to no longer having alternating proprietorship material costs, and the lower costs related to having a portion of our beer produced by A-B inFort Collins . The increases in Beer Related Gross profit and gross margin rate in 2018 compared to 2017 were primarily due to increased unit pricing, lower excise tax rates, and the lower costs related to having a portion of our beer produced by A-B inFort Collins , partially offset by$3.4 million of non-recurring fees earned from Pabst related to a contract brewing volume shortfall in 2017, and increases in brewery costs and distribution rates on a per barrel basis.
The increases in Brewpubs Gross profit and gross margin in 2019 compared to 2018
were primarily due to the net results of our newly acquired AMB and Wynwood
brewpub operations, partially offset by declines in our
The decreases in the Brewpubs Gross profit and gross margin rate in 2018 compared to 2017 were primarily due to the closure of ourWoodinville brewpub and the net costs associated with our brewpub inSeattle , partially offset by the increased sales at our Kona brewpub. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") include compensation and related expenses for our sales and marketing activities, management, legal and other professional and administrative support functions.
Information regarding SG&A was as follows (dollars in thousands):
Year Ended December 31, Dollar 2019 2018 Change % Change$ 80,967 $ 62,572 $ 18,395 29.4 % As a % of Net sales 42.0 % 30.3 % Year Ended December 31, Dollar 2018 2017 Change % Change$ 62,572 $ 60,463 $ 2,109 3.5 % As a % of Net sales 30.3 % 29.1 % The increase in SG&A in 2019 compared to 2018 was primarily due to an increase in creative and media spend related to our Kona marketing campaign, including our first national campaign during theNCAA's basketball tournament,March Madness , of$6.9 million , increases in employee related costs, and a$4.7 million charge based on our current estimate of the probable costs of settling the litigation related to the Kona class action lawsuit. See Note 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The increase in SG&A in 2018 compared to 2017 was primarily due to increases in in-market promotional spend and professional fees, partially offset by a gain of$0.5 million in the first quarter of 2018 related to the sale of theWoodinville brewing and bottling equipment and a decrease in general and administrative costs. Interest Expense Information regarding Interest expense was as follows (dollars in thousands): Year Ended December 31, Dollar 2019 2018 Change % Change Interest expense $ 1,850$ 614 $ 1,236 201.3 % Year Ended December 31, Dollar 2018 2017 Change % Change Interest expense $ 614$ 715 $ (101 ) (14.1 )% 36
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Index Year Ended December 31, 2019 2018 2017 Average debt outstanding$ 44,595 $ 18,664 $ 27,189 Average interest rate 4.06 % 2.96 % 2.08 % The increase in Interest expense in 2019 compared to 2018 was primarily due to increases in our average debt outstanding and higher average interest rate. The increase in our average debt outstanding were due to borrowing on our line of credit to facilitate the acquisitions that were completed in the three-month period endedDecember 31, 2018 and new secured borrowing pursuant to our Master Lease Agreement executed during the second quarter of 2019. The decrease in Interest expense in 2018 compared to 2017 was primarily due to a decrease in our average debt outstanding, partially offset by an increase in our average interest rate. The decrease in our average debt outstanding was due to principal payments made on our term loan and the payoff of our revolving credit balance following the sale of ourWoodinville, Washington brewery inJanuary 2018 . Income Tax Provision (Benefit) Our effective income tax rate was (34.1)%, 23.7% and (135.7)% in 2019, 2018 and 2017, respectively. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes, tax credits, and, for 2017, income excluded from taxation under the domestic production activities exclusion. In the third quarter of 2019, we recognized a$1.3 million benefit for research and development tax credits.The tax credits were claimed on our 2015 - 2018 tax returns and were based upon a study completed in the third quarter of 2019. Additional credits of$0.4 million were recognized for 2019 research and development tax credits. Unrecognized tax benefits associated with these tax credits total$0.3 million .
Our effective income tax rate in 2018 reflects the benefit of tax legislation,
which reduced our federal tax rate from 34% to 21% effective
In the second quarter of 2017, we recognized a tax credit of$164,000 for a biofuel project at ourNew Hampshire brewery. The tax credit was claimed on our 2016 tax return and is based upon a study completed in the second quarter of 2017. In the fourth quarter of 2017, we recognized the impact of enacted tax legislation, which reduced our federal tax rate from 34% to 21% effectiveJanuary 1, 2018 . This reduction resulted in a$6.9 million decrease to our deferred tax liability, which was recognized as a reduction to our income tax provision in the fourth quarter of 2017, the period of enactment. Before consideration of the effects of tax reform, our income tax provision would have been$1.4 million , for an effective income tax rate of 34.9%. Our accounting for the income tax effects of the new tax legislation is complete, and we do not anticipate adjustments to such accounting in future periods.
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, including acquisitions, 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 beginningJanuary 1, 2020 , primarily from cash flows generated from operations and borrowing under our line of credit facility as the need arises. Capital resources available to us atDecember 31, 2019 included$0.5 million of Cash and cash equivalents and$25.0 million available under our line of credit facility.
We had
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A summary of our cash flow information was as follows (in thousands):
Year Ended
2019 2018
2017
Net cash provided by operating activities
$ 16,778 Net cash used in investing activities (14,485 ) (27,124 ) (20,348 ) Net cash provided by (used in) financing activities (13,254 ) 14,504
3,707
Increase (decrease) in cash, cash equivalents and restricted cash$ (731 ) $ 621 $ 137 Cash provided by operating activities of$27.0 million in 2019 resulted from our Net loss of$(12.9) million being offset by net non-cash expenses of$7.6 million , and changes in our operating assets and liabilities as discussed in more detail below. Accounts receivable, net, decreased$12.5 million to$17.5 million atDecember 31, 2019 , compared to$30.0 million atDecember 31, 2018 . This decrease was primarily due to a$12.6 million decrease in our receivable from A-B to a total of$11.4 million atDecember 31, 2019 , primarily due to the$6.0 million international distribution agreement fee from ABWI outstanding atDecember 31, 2018 , which was received inJanuary 2019 . Historically, we have not had collection problems related to our accounts receivable. Inventories increased$1.9 million to$19.1 million atDecember 31, 2019 , compared to$17.2 million atDecember 31, 2018 . The increase was primarily due to an increase in raw materials as we purchased hops under raw material contracts and purchases of packaging materials, partially offset by a decrease in promotional merchandise. Accounts payable decreased$1.8 million to$15.8 million atDecember 31, 2019 , compared to$17.6 million atDecember 31, 2018 , primarily due to the timing of payments for capital projects and marketing expenditures. The portion of our payable to A-B that is included in our Accounts payable totaled$6.0 million atDecember 31, 2019 , which is slightly higher than the balance atDecember 31, 2018 , primarily due to the timing of payments related to our contract brewing relationship with ABCS. Deferred revenue increased$16.8 million to$22.7 million atDecember 31, 2019 compared to$6.0 million atDecember 31, 2018 , primarily due to the receipt of a$20.0 million one-time incentive payment fromABC as required by the terms of the International Distribution Agreement. As ofDecember 31, 2019 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
• federal NOL of
• federal alternative minimum tax ("AMT") credit carry forwards of
• federal employer FICA tips credit of
• federal research and development tax credit of
tax credits less
The AMT credit carryforward is refundable over the next four years. As such, the
carryforward is recognized as a tax receivable on our Consolidated Balance
Sheets at
Capital expenditures of$14.4 million in 2019 were primarily directed to beer production capacity and efficiency improvement, enterprise resource planning software and Brewpubs expansions. As ofDecember 31, 2019 , we had an additional$1.6 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to$3.1 million atDecember 31, 2018 . We anticipate capital expenditures will not exceed$10.0 million in 2020, primarily for our new Kona brewery and enterprise resource planning software. 38
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Credit Agreement OnOctober 10, 2018 , we executed a First Amendment (the " First Amendment") to our Amended and Restated Credit Agreement withBank of America, N.A . ("BofA") datedNovember 30, 2015 (as amended, the "Credit Agreement"). The Credit Agreement as amended by the First Amendment provides for a 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 originally valued$10.8 million term loan ("Term Loan"). The primary changes effected by the First Amendment were to increase the maximum amount available under the Line of Credit from$40.0 million to$45.0 million and to extend the maturity date of the Line of Credit fromNovember 30, 2020 toSeptember 30, 2023 , which is also the maturity date of the Term Loan. The maximum amount of the Line of Credit is subject to loan commitment reductions in the amount of$750,000 each quarter beginningMarch 31, 2020 . The First Amendment also increased the limit on the total amount of investments that we may make in other craft brewers, other than the acquisition of all or substantially all of the assets or controlling ownership interests, from$5.0 million to$10.0 million and revised the definition of Consolidated EBITDA to account for legal fees and costs associated with litigation described in Note 19. We may draw upon the Line of Credit for working capital and general corporate purposes. As ofDecember 31, 2019 , we had$25.0 million in funds available to be drawn upon from our Line of Credit and$20.0 million of borrowings outstanding. AtDecember 31, 2019 ,$8.4 million was outstanding under the Term Loan. Under the Credit Agreement as in effect atDecember 31, 2019 , interest accrues at an annual rate based on the London Inter-Bank Offered Rate ("LIBOR") Daily Floating Rate plus a marginal rate. The marginal rate varies from 0.75% to 2.00% for the Line of Credit and Term Loan based on our funded debt ratio. AtDecember 31, 2019 , our marginal rate was 2.00%, resulting in an annual interest rate of 2.96%. It is likely that LIBOR will no longer be used as a reference rate by most, if not all, financial institutions before year-end 2021.
Accrued interest for the Term Loan is due and payable monthly. Principal
payments on the Term Loan are due monthly in accordance with an agreed-upon
schedule set forth in the Credit Agreement, with any unpaid principal balance
and unpaid accrued interest due and payable on
The Credit Agreement authorizes acquisitions within the same line of business as long as we remain in compliance with the financial covenants of the Credit Agreement and there is at least$5.0 million of availability remaining on the Line of Credit following the acquisition. EffectiveMay 7, 2019 , we executed a Second Amendment to the Credit Agreement withBofA (the "Second Amendment"). EBITDA, as defined in the Second Amendment, includes certain adjustments specified in the Second Amendment. Per the Second Amendment, beginningJuly 1, 2019 , and in each fiscal quarter thereafter, the maximum Consolidated Leverage Ratio is 3.50 to 1.00, as A-B did not make a Qualifying Offer as defined in the International Distribution Agreement withAnheuser-Busch Worldwide Investments, LLC , an affiliate of A-B.
Effective
EffectiveDecember 31, 2019 , we executed a Fourth Amendment to the Credit Agreement withBofA (the "Fourth Amendment"). The primary changes effected by the Fourth Amendment were to: (i) add new defined terms relating to the Agreement and Plan of Merger, dated as ofNovember 11, 2019 , by and among CBA,Barrel Subsidiary, Inc. , andAnheuser-Busch Companies, LLC (the "A-B Merger"); (ii) revise the definition of Consolidated EBITDA to account for legal fees and expenses paid in cash in connection with the A-B Merger; and (iii) revise the financial covenants. As amended, the Credit Agreement requires us to satisfy the following financial covenants: (i) on or after the earliest to occur ofJuly 1, 2020 or the termination of the A-B Merger, a Consolidated Leverage Ratio of 3.50 to 1.00; (ii) on or after the earliest to occur ofJuly 1, 2020 or the termination of the A-B Merger, a Fixed Charge Coverage Ratio of 1.20 to 1.00; and (iii) on a trailing four-quarter basis at each ofMarch 31, 2020 andJune 30, 2020 , a minimum Consolidated EBITDA of$3.0 million . Failure to maintain compliance with these covenants is an event of default and would giveBofA the right to declare the entire outstanding loan balance immediately due and payable.
The Credit Agreement, as revised by the Fourth Amendment, in effect at
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Secured Borrowing OnJune 20, 2019 we executed an agreement withBofA , pursuant to our Master Lease Agreement, for$5.2 million in cash in exchange for a secured interest in our previously installed can line at ourPortland brewing facility. The maturity date of the secured borrowing isJune 21, 2026 . We used the funds to pay down our Line of Credit. AtDecember 31, 2019 ,$4.9 million was outstanding at an interest rate of 4.54%.
Contractual Commitments and Obligations
The following is a summary of our contractual commitments and obligations as of
Payments
Due By Period
2025 and Contractual Obligations Total 2020 2021 and 2022 2023 and 2024 beyond Term loan$ 8,381 $ 459 $ 973 $ 6,949 $ - Interest on term loan(1) 323 92 168 63 - Line of credit 19,980 - - 19,980 - Secured borrowing 4,874 660 1,412 1,547 1,255 Interest on secured borrowing(2) 763 208 322 188 45 Operating leases 39,099 7,470 4,065 2,960 24,604 Finance leases 1,196 333 465 398 - Purchase commitments 14,681 6,121 7,922 638 - Sponsorship obligations 4,236 2,129 1,868 239 - Interest rate swap(3) 600 171 312 117 -$ 94,133 $ 17,643 $ 17,507 $ 33,079 $ 25,904
(1) The variable interest rate on our Term Loan and Line of Credit was 2.96% at
(2) The fixed rate on our secured borrowing was 4.54%.
(3) The fixed rate on our interest rate swap was 2.86%. We pay interest at the
fixed rate and receive interest at the Benchmark Rate, which was 1.75% at
December 31, 2019 .
See Notes 10 and 19 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.
Inflation
We believe that the impact of inflation was minimal on our business in 2019, 2018 and 2017.
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 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.Goodwill and Other Indefinite-Lived Intangible Assets We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or as indicators of impairment are present. We have an option to first assess certain qualitative factors for indications of impairment in order to determine whether it is necessary to perform the quantitative, two-step impairment test. If we choose not to first perform the qualitative test, or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we perform the quantitative two-step impairment test. Our goodwill and other indefinite-lived intangible assets impairment loss calculations contain uncertainties because they require management to make assumptions in the qualitative assessment of relevant events and circumstances and to estimate the fair value of our reporting units and indefinite-lived intangible assets, including estimating future cash flows. These calculations contain uncertainties because they require management to make assumptions and apply judgment to estimate economic factors and the profitability of future business operations and, if necessary, the fair value of a reporting unit's assets and liabilities. Further, our 40
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ability to realize the future cash flows used in our fair value calculations is affected by changes in such factors as our operating performance, our business strategies, our industry and economic conditions. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. Based on the results of our annual impairment test for goodwill and other indefinite-lived intangible assets, no impairment was recorded. We believe, based on our assessment discussed above, that our goodwill and other indefinite-lived intangible assets are not at risk of impairment. However, if actual results are not consistent with our estimates or assumptions or there are significant changes in any of these estimates, projections or assumptions, the fair value of these assets in future measurement periods could be materially affected, resulting in an impairment that could have a material adverse effect on our results of operations. Refundable Deposits on Kegs We distribute our draft beer in kegs that are owned by us and are reflected as a component of Property, equipment and leasehold improvements in our Consolidated Balance Sheets at cost and are depreciated over the estimated useful life of the keg. When draft beer is shipped to the wholesaler, we collect a refundable deposit, reflected as a current liability in our Consolidated Balance Sheets. Upon return of the keg to us, the deposit is refunded to the wholesaler. When a wholesaler cannot account for some of our kegs for which it is responsible, it pays us a fixed fee and forfeits its deposit for each keg determined to be lost. We have experienced some loss of kegs and anticipate that some loss will occur in future periods due to the significant volume of kegs handled by each wholesaler and retailer, the similarities between kegs owned by most brewers, and the relatively low deposit collected on each keg when compared with the market value of the keg. We believe that this is an industry-wide issue and our loss experience is typical of the industry. In order to estimate forfeited deposits attributable to lost kegs, we periodically use internal records, A-B records, other third-party records, and historical information to estimate the physical count of kegs held by wholesalers and A-B. These estimates affect the amount recorded as brewery equipment and refundable deposits as of the date of the consolidated financial statements. The actual liability for refundable deposits could differ from estimates. Revenue Recognition We recognize revenue from product sales, net of excise taxes, discounts and certain fees we must pay in connection with sales to a member of the A-B wholesale distributor network, when the products are delivered to the member. A member of the A-B wholesale distributor network may be a branch of A-B or an independent wholesale distributor. As our revenue recognition policy was not materially changed by the adoption of ASC 606 in 2018, this policy applied to all periods presented. We recognize revenue on contract brewing sales when the product is shipped to our contract brewing customer, at which point our performance obligations have been fulfilled, in both cases this marks the time when our performance obligation(s) are fulfilled.
We recognize revenue on retail sales at the time of sale and we recognize revenue from events at the time of the event as this effectively models the satisfaction over time of the underlying performance obligations.
We recognize revenue related to non-refundable payments to be received on specified dates throughout a contract term on a straight-line basis over the life of the related contract or contracts.
Deferred Taxes Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilized tax credits and net operating loss carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax assets. If we are unable to generate adequate taxable income in future periods or our assessment that it is more likely than not that certain deferred tax assets will be realized is otherwise not accurate, we may incur charges in future periods to record a valuation allowance on our gross deferred tax assets.
Leases
We lease office space, restaurant and production facilities, warehouse and storage space, land and equipment under operating leases that expire at various dates through the year endingDecember 31, 2064 and equipment under finance leases that expire at various dates through the year endingDecember 31, 2024 . Certain leases contain renewal options and escalation clauses for adjusting rent to reflect changes in price indices or scheduled adjustments.
When recording the lease assets and related lease liabilities on our Consolidated Balance Sheets, we exercise judgment in determining the lease term and implicit interest rate if not stated in the agreement.
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We determine the lease term based on the provisions of the underlying agreement, the economic value of leasehold improvements and other relevant factors.
We determine the implicit rate based on the estimated rate at which we would borrow, in the current economic environment, an amount equal to the lease payments over a similar term on a collateralized basis, which is used to determine the present value of lease payments.
Leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets and we recognize lease expense for these leases on a straight-line basis over the lease term.
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.
Recent Accounting Pronouncements
See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
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