CRAFT BREW ALLIANCE, INC. 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 endedDecember 31, 2019 ("2019 Annual Report"), the risk factor set forth in Part II, Item 1A below, and those described from time to time in our future reports filed with theSecurities and Exchange Commission (the "SEC"). Certain forward-looking statements are subject to the anticipated occurrence and timing of the closing of the merger transaction pursuant to whichAnheuser-Busch Companies, LLC , is expected to acquireCraft Brew Alliance, Inc. 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 2019 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.
Overview
Craft Brew Alliance, Inc. ("CBA") is the eighth largest craft brewing company in theU.S. and a leader in brewing, branding, and bringing to market world-class American craft beers and beverages. 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 in 2019, expanded distribution of our newly acquired brandsAppalachian Mountain Brewery , Cisco Brewers, andWynwood Brewing Co. across their respective home markets ofNorth Carolina , New 16
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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 remains subject to customary closing conditions, including certain regulatory approvals. In earlyMarch 2020 , we began seeing the impact of the COVID-19 pandemic on our business. The impact was primarily visible in significantly reduced demand from the on-premise channel and the closure of our brewpubs for on-premise business. 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.
Following is a summary of our financial results:
Number of
Three Months Ended March 31, Net sales Net income (loss) barrels sold
2020 $43.9 million $0.6 million 156,400
2019 $47.0 million $(7.4) million 169,500
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,
2020 2019
Sales 104.4 % 105.9 %
Less excise taxes (4.4) (5.9)
Net sales 100.0 100.0
Cost of sales 65.4 65.6
Gross profit 34.6 34.4
Selling, general and administrative expenses 32.9 54.4
Operating income (loss) 1.6 (20.0)
Interest expense (0.6) (0.7)
Other expense, net - -
Income (loss) before income taxes 1.0 (20.6)
Income tax benefit (0.4) (4.9)
Net income (loss) 1.4 % (15.7) %
(1)Percentages may not add 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):
Three Months Ended March 31,
Beer
2020 Related Brewpubs Total
Net sales $ 38,767 $ 5,134 $ 43,901
Gross profit $ 14,982 $ 201 $ 15,183
Gross margin 38.6 % 3.9 % 34.6 %
2019
Net sales $ 40,789 $ 6,203 $ 46,992
Gross profit $ 15,508 $ 675 $ 16,183
Gross margin 38.0 % 10.9 % 34.4 %
Sales by Category
Sales by category were as follows (dollars in thousands):
Three Months Ended March 31, Dollar
Sales by Category 2020 2019 Change % Change
A-B and A-B related(1) $ 37,231 $ 40,418 $ (3,187) (7.9) %
Contract brewing and beer related(2) 3,460 3,147 313 9.9 %
Excise taxes (1,924) (2,776) 852 (30.7) %
Net beer related sales 38,767 40,789 (2,022) (5.0) %
Brewpubs(3) 5,134 6,203 (1,069) (17.2) %
Net sales $ 43,901 $ 46,992 $ (3,091) (6.6) %
(1)A-B and A-B related includes domestic and international sales sold through
A-B and Ambev, fees earned pursuant to the Brewing Agreement with Anheuser-Busch
Companies, LLC ("ABC"), and the international distribution fees earned from
ABWI.
(2)Beer related includes international sales and owned brands not sold through
A-B or Ambev.
(3)Brewpubs sales include sales of promotional merchandise and sales of beer
directly to customers.
Shipments by Category
Shipments by category were as follows (in barrels):
Increase % Change in
Three Months Ended March 31, 2020 Shipments 2019 Shipments (Decrease) Change Depletions(1)
A-B and A-B related(2) 138,200 154,600 (16,400) (10.6) % (6) %
Contract brewing and beer related(3) 16,500 13,100 3,400 26.0 %
Brewpubs 1,700 1,800 (100) (5.6) %
Total 156,400 169,500 (13,100) (7.7) %
(1)Change in depletions reflects the year-over-year change in barrel volume
sales of beer by wholesalers to retailers.
(2)A-B and A-B related includes domestic and international shipments distributed
through A-B and Ambev, and shipments pursuant to the Brewing Agreement with ABC .
(3)Beer related includes international shipments and shipments of our owned
brands not distributed through A-B or Ambev.
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The decrease in sales to A-B and A-B related in the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to a decrease in shipment volume, partially offset by an increase in average unit pricing and a decrease in promotional pricing. The decrease in shipment volume was primarily attributed to the sharp decline in draft sales inMarch 2020 as a result of the closure of most on-premise retail locations across the country. We expect the demand for draft beer to remain low for the second quarter of 2020 and, potentially, into the second half of 2020. As our shipments further trend towards packaged beer, we expect our average unit pricing to increase as the sales price for packaged beer is greater than draft. The increase in Contract brewing and beer related sales in the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to increases in international shipment volumes and brands distributed outside the A-B distribution network, partially offset by a decrease in contract brewing shipment volumes. Brewpubs sales decreased in the three-month period endedMarch 31, 2020 compared to the same period of 2019, primarily due to the closure of our brewpubs to on-premise business that began in mid-March due to the COVID-19 pandemic and public health and government-mandated strict social distancing requirements. We expect our Brewpub sales to remain low for the second quarter of 2020 and, potentially, into the second half of 2020.
Shipments by Brand The following table sets forth a comparison of shipments by brand (in barrels):
% Change in
Three Months Ended March 31, 2020 Shipments 2019 Shipments Decrease Change Depletions Kona 107,000 108,800 (1,800) (1.7) % (5) % Widmer Brothers 16,000 21,600 (5,600) (25.9) % (13) % Redhook 13,200 14,800 (1,600) (10.8) % (9) % Omission 8,800 9,100 (300) (3.3) % 5 % All other(1) 9,400 10,100 (700) (6.9) % (1) % Total(2) 154,400 164,400 (10,000) (6.1) % (6) % (1)All other includes the shipments and depletions from our Square Mile, AMB, Cisco Brewers, and Wynwood brand families, shipped by us pursuant to distribution agreements. (2)Total shipments by brand include international shipments and exclude shipments produced under our contract brewing arrangements.
The slight decrease in our Kona brand shipments in the three-month period ended
The decrease in our Widmer Brothers brand shipments in the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to decreases in Hefeweizen brand shipments. Redhook brand shipments decreased in the three-month period endedMarch 31, 2020 compared to the same period of 2019, primarily due to decreases in Longhammer IPA and Brewers Choice variety pack brand shipments, partially offset by an increase in Big Ballard IPA shipments. Omission brand shipments decreased in the three-month period endedMarch 31, 2020 compared to the same period of 2019, primarily due to decreases in shipments of the Pale Ale, Lager and IPA brands, partially offset by shipments of our newly released seltzer. The decrease in All other shipments in the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to decreases in AMB and Cisco brand shipments, partially offset by an increase in Wynwood brand shipments. 19
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Shipments by Package
The following table sets forth a comparison of our shipments by package,
excluding shipments produced under our contract brewing arrangements (in
barrels):
Three Months Ended March 31,
2020 2019
Shipments % of Total Shipments % of Total
Draft 28,200 18.3 % 37,500 22.8 %
Packaged 126,200 81.7 % 126,900 77.2 %
Total 154,400 100.0 % 164,400 100.0 %
The shift in package mix from draft to packaged in the three-month period ended
March 31, 2020 compared to the same period of 2019 was primarily due to
widespread closures in the on-premise channel that were caused by the COVID-19
pandemic and government-mandated strict social distancing requirements. We
expect this trend to continue throughout the second quarter of 2020 and,
possibly, into the second half of 2020.
Cost of Sales Cost of sales includes purchased raw and component materials, direct labor, overhead and shipping costs.
Information regarding Cost of sales was as follows (dollars in thousands):
Three Months Ended March 31, Dollar
2020 2019 Change % Change
Beer Related $ 23,785 $ 25,281 $ (1,496) (5.9) %
Brewpubs 4,933 5,528 (595) (10.8) %
Total $ 28,718 $ 30,809 $ (2,091) (6.8) %
The decrease in Beer Related Cost of sales in the three-month period ended
March 31, 2020 compared to the same period of 2019 was primarily due to the
decrease in shipment volume, partially offset by an increase in our Beer Related
Cost of sales on a per barrel basis. As our shipments further trend toward
packaged beer, we expect our average unit costs to increase as the cost to
produce packaged beer is greater than draft.
The decrease in Brewpubs Cost of sales in the three-month period ended March 31,
2020 compared to the same period of 2019 was primarily due to ceasing operations
and leasing of our Portsmouth brewpub to the founders of Cisco, which occurred
during April 2019 , and the closure of the Portland taproom, which occurred in
February 2019 . A decrease in Brewpubs Cost of sales is anticipated for the
second quarter of 2020 and, potentially, into the second half of 2020 due to the
impact of the COVID-19 pandemic.
Capacity Utilization
Capacity utilization is calculated by dividing total shipments by approximate
working capacity and was as follows:
Three Months Ended March 31,
2020 2019
Capacity Utilization 43 % 47 %
Our capacity utilization declined in the three-month period ended March 31, 2020
compared to the same period of 2019 due to a larger percentage of our beer being
brewed by ABCS as part of our contract brewing relationship and evolving brewery
footprint. We also experienced a decrease in our capacity utilization as a
result of the decrease in demand for draft beer.
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Gross Profit
Information regarding Gross profit was as follows (dollars in thousands):
Three Months Ended March 31, Dollar
2020 2019 Change % Change
Beer Related $ 14,982 $ 15,508 $ (526) (3.4) %
Brewpubs 201 675 (474) (70.2) %
Total $ 15,183 $ 16,183 $ (1,000) (6.2) %
Gross profit as a percentage of Net sales, or gross margin, was as follows:
Three Months Ended March 31,
2020 2019
Beer Related 38.6 % 38.0 %
Brewpubs 3.9 % 10.9 %
Overall 34.6 % 34.4 %
The decrease in Beer Related Gross profit in the three-month period ended
The decrease in Brewpubs Gross profit and gross margin in the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to the closure of our brewpubs to on-premise business beginning in mid-March due to the COVID-19 pandemic, partially offset by cost savings associated with the ceasing of operations and leasing of ourPortsmouth brewpub to the founders of Cisco and the closure of thePortland taproom. 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
2020 2019 Change % Change
Selling, general and administrative expenses
$ (11,104) (43.4) % As a % of Net sales 32.9 % 54.4 % The decrease in SG&A for the three-month period endedMarch 31, 2020 compared to the same period of 2019 was primarily due to a decrease in creative and media spend related to the non-recurring Kona marketing campaign of$4.6 million in 2019, and a non-recurring charge related to the settlement of the litigation related to the Kona class action lawsuit in 2019 of$4.7 million , as well as a decrease in employee related costs, and a one-time legal settlement benefit of$1.0 million related to our formerWoodinville property received inMarch 2020 . Interest Expense Information regarding Interest expense was as follows (dollars in thousands): Three Months Ended March 31, Dollar 2020 2019 Change % Change$ 267 $ 308 $ (41) (13.3) % 21
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Three Months Ended
March 31,
2020 2019
Average debt outstanding $41,806 $44,880
Average interest rate 2.37 % 2.69 %
The decrease in Interest expense in the three-month period ended
Income Tax Benefit Our effective income tax rate was 36.8% for the first three months of 2020 and 24.0% in the first three months of 2019. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes and tax credits. In the first three months of 2020 we recognized a one-time tax benefit of$365 related to the net operating loss carryback provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was signed into law onMarch 27, 2020 .
Liquidity and Capital Resources
We have required capital primarily for the construction and development of our production breweries, to support our brewery footprint evolution, 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 beginningApril 1, 2020 primarily from cash on hand, cash flows generated from operations and borrowing under our line of credit as the need arises. Capital resources available to us atApril 1, 2020 included$0.1 million of Cash and cash equivalents and$9.9 million available under our revolving credit facility. AtMarch 31, 2020 andDecember 31, 2019 , we had$13.9 million and$1.6 million of working capital, respectively, and our debt as a percentage of total capitalization (total debt and common shareholders' equity) was 27.7% and 21.5%, respectively.
A summary of our cash flow information was as follows (in thousands):
Three Months Ended
March 31,
2020 2019
Net cash provided by (used in) operating activities
(6,969) (5,157)
Net cash provided by financing activities 13,813
2,175
Increase (decrease) in Cash and cash equivalents
Cash used in operating activities of$7.2 million in the first three months of 2020 resulted from our Net income of$0.6 million and net non-cash expenses of$3.0 million being offset by changes in our operating assets and liabilities as discussed in more detail below. Accounts receivable, net, increased$4.0 million to$21.5 million atMarch 31, 2020 compared to$17.5 million atDecember 31, 2019 . This increase was primarily due to the timing of shipments and an increase of$3.4 million in our receivable from A-B and ABWI, which totaled$14.8 million atMarch 31, 2020 . Historically, we have not had collection problems related to our accounts receivable. Inventories increased$3.9 million to$23.0 million atMarch 31, 2020 compared to$19.1 million atDecember 31, 2019 . The increase was primarily due to an increase in finished goods and packaging materials as a result of the timing of shipments in the fourth quarter of 2019 and first quarter of 2020, seasonality and the forecasted demand for our beer.
Accounts payable increased
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Capital expenditures of$7.1 million in the first three months of 2020 were primarily directed to beer production capacity and efficiency improvements. As ofMarch 31, 2020 , we had an additional$0.6 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to$1.6 million atDecember 31, 2019 . We anticipate capital expenditures will not exceed a total of$10.0 million in 2020, primarily for our new Kona brewery and enterprise resource planning software. 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 a$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 . We may draw upon the Line of Credit for working capital and general corporate purposes.
As of
Under the Credit Agreement as in effect atMarch 31, 2020 , 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. AtMarch 31, 2020 , our marginal rate was 2.00%, resulting in an annual interest rate of 2.83%. 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. As amended in 2019, 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. AtMarch 31, 2020 , we were in compliance with all applicable contractual financial covenants of the Credit Agreement. 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. AtMarch 31, 2020 ,$4.7 million was outstanding at an interest rate of 4.54%.
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.
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Our critical accounting policies, as described in our 2019 Annual Report on Form 10-K, relate to goodwill, indefinite-lived intangible assets, long-lived assets, refundable deposits on kegs, revenue recognition, deferred taxes and leases. There have been no changes to our critical accounting policies sinceDecember 31, 2019 .
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.
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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