10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2015
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ______________
 
Commission File Number 0-26542

CRAFT BREW ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1141254
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

929 North Russell Street
Portland, Oregon  97227
(Address of principal executive offices)

(503) 331-7270
(Registrant’s telephone number, including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). Check one: 
Large Accelerated Filer ☐
 
Accelerated Filer ☒
Non-accelerated Filer ☐ (Do not check if a smaller reporting company)
 
Smaller Reporting Company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of October 27, 2015 was 19,171,887.

 


CRAFT BREW ALLIANCE, INC.
INDEX TO FORM 10-Q
 
PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II ‑ OTHER INFORMATION
 
 
 
Item 1A.
 
 
Item 6.
 
 
 

1
Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
 
CRAFT BREW ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,816

 
$
981

Accounts receivable, net
18,719

 
11,741

Inventory, net
18,276

 
18,971

Deferred income tax asset, net
1,802

 
1,670

Other current assets
3,831

 
4,413

Total current assets
44,444

 
37,776

Property, equipment and leasehold improvements, net
112,964

 
110,350

Goodwill
12,917

 
12,917

Intangible and other assets, net
16,914

 
17,558

Total assets
$
187,239

 
$
178,601

Liabilities and Shareholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
17,420

 
$
12,987

Accrued salaries, wages and payroll taxes
5,775

 
5,114

Refundable deposits
7,934

 
8,152

Other accrued expenses
2,008

 
2,316

Current portion of long-term debt and capital lease obligations
503

 
1,157

Total current liabilities
33,640

 
29,726

Long-term debt and capital lease obligations, net of current portion
16,242

 
13,720

Fair value of derivative financial instruments
641

 
503

Deferred income tax liability, net
18,865

 
18,570

Other liabilities
717

 
665

Total liabilities
70,105

 
63,184

Commitments and contingencies


 


Common shareholders' equity:
 

 
 

Common stock, $0.005 par value. Authorized 50,000,000 shares; issued and outstanding 19,171,887 and 19,115,396
96

 
96

Additional paid-in capital
139,234

 
138,391

Accumulated other comprehensive loss
(397
)
 
(312
)
Accumulated deficit
(21,799
)
 
(22,758
)
Total common shareholders' equity
117,134

 
115,417

Total liabilities and common shareholders' equity
$
187,239

 
$
178,601

 
The accompanying notes are an integral part of these financial statements.


2
Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Sales
$
58,460

 
$
55,871

 
$
165,717

 
$
163,616

Less excise taxes
3,771

 
3,798

 
10,788

 
11,031

Net sales
54,689

 
52,073

 
154,929

 
152,585

Cost of sales
37,830

 
37,428

 
108,218

 
107,526

Gross profit
16,859

 
14,645

 
46,711

 
45,059

Selling, general and administrative expenses
15,497

 
13,554

 
44,713

 
40,824

Operating income
1,362

 
1,091

 
1,998

 
4,235

Interest expense
(148
)
 
(111
)
 
(419
)
 
(317
)
Other income (expense), net
7

 
(54
)
 
20

 
(51
)
Income before income taxes
1,221

 
926

 
1,599

 
3,867

Income tax expense
489

 
361

 
640

 
1,508

Net income
$
732

 
$
565

 
$
959

 
$
2,359

Basic and diluted net income per share
$
0.04

 
$
0.03

 
$
0.05

 
$
0.12

Shares used in basic per share calculations
19,171

 
19,052

 
19,144

 
19,019

Shares used in diluted per share calculations
19,180

 
19,103

 
19,171

 
19,086

 
The accompanying notes are an integral part of these financial statements.


3
Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
732

 
$
565

 
$
959

 
$
2,359

Unrealized gain (loss) on derivative hedge transactions, net of tax
(117
)
 
19

 
(85
)
 
(210
)
Comprehensive income
$
615

 
$
584

 
$
874

 
$
2,149

 
The accompanying notes are an integral part of these financial statements.


4
Index

CRAFT BREW ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
959

 
$
2,359

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
7,221

 
6,432

Loss on sale or disposal of Property, equipment and leasehold improvements
318

 
74

Deferred income taxes
217

 
316

Stock-based compensation
880

 
805

Excess tax benefit from employee stock plans
(50
)
 
(191
)
Other
(227
)
 
(327
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(6,978
)
 
301

Inventories
1,375

 
(2,287
)
Other current assets
581

 
106

Accounts payable and other accrued expenses
2,893

 
861

Accrued salaries, wages and payroll taxes
661

 
1,061

Refundable deposits
452

 
1,188

Net cash provided by operating activities
8,302

 
10,698

Cash flows from investing activities:
 

 
 

Expenditures for Property, equipment and leasehold improvements
(9,772
)
 
(12,936
)
Proceeds from sale of Property, equipment and leasehold improvements
410

 
236

Net cash used in investing activities
(9,362
)
 
(12,700
)
Cash flows from financing activities:
 

 
 

Principal payments on debt and capital lease obligations
(968
)
 
(458
)
Proceeds from capital lease financing
—

 
841

Net borrowings under revolving line of credit
2,900

 
—

Proceeds from issuances of common stock
64

 
321

Tax payments related to performance shares issued
(151
)
 
(150
)
Excess tax benefit from employee stock plans
50

 
191

Net cash provided by financing activities
1,895

 
745

Increase (decrease) in Cash and cash equivalents
835

 
(1,257
)
Cash and cash equivalents:
 

 
 

Beginning of period
981

 
2,726

End of period
$
1,816

 
$
1,469

Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
482

 
$
401

Cash paid for income taxes, net
58

 
889

Supplemental disclosure of non-cash information:
 

 
 

Purchases of Property, equipment and leasehold improvements included in Accounts payable at end of period
$
1,917

 
$
331

The accompanying notes are an integral part of these financial statements.

5
Index

CRAFT BREW ALLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Annual Report”). These consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements are unaudited but, in the opinion of management, reflect all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. All such adjustments were of a normal, recurring nature. The results of operations for such interim periods are not necessarily indicative of the results of operations for the full year.

Note 2. Recent Accounting Pronouncements

ASU 2015-15
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2015-15, “Interest - Imputation of Interest (Subtopic 835-30).” ASU 2015-15 provides guidance as to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements. We do not expect the adoption of ASU 2015-15 to have a material effect on our financial position, results of operations or cash flows.

ASU 2015-14
In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606)." The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.

ASU 2015-11
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)." ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out ("LIFO") method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

ASU 2015-05
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)." ASU 2015-05 provides guidance regarding the accounting for a customer's fees paid in a cloud computing arrangement; specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-05 to have a material effect on our financial position, results of operations or cash flows.

ASU 2015-03
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. We do not expect the adoption of ASU 2015-03 to have a material effect on our financial position, results of operations or cash flows.


6
Index

ASU 2015-02
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2015-02 to have a material effect on our financial position, results of operations or cash flows.

Note 3. Cash and Cash Equivalents

We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2015 and December 31, 2014, we did not have any cash equivalents.

Under our cash management system, we utilize a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued but not yet presented to banks may result in overdraft balances for accounting purposes. As of September 30, 2015 and December 31, 2014, there were no bank overdrafts. Changes in bank overdrafts from period to period are reported in the Consolidated Statements of Cash Flows as a component of operating activities within Accounts payable and Other accrued expenses.

Note 4. Inventories

Inventories, except for pub food, beverages and supplies, are stated at the lower of standard cost or market. Pub food, beverages and supplies are stated at the lower of cost or market.

We regularly review our inventories for the presence of obsolete product attributed to age, seasonality and quality. If our review indicates a reduction in utility below the product’s carrying value, we reduce the product to a new cost basis. We record the cost of inventory for which we estimate we have more than a twelve-month supply as a component of Intangible and other assets, net on our Consolidated Balance Sheets.

Inventories consisted of the following (in thousands):

 
September 30,
2015
 
December 31,
2014
Raw materials
$
4,742

 
$
4,414

Work in process
3,147

 
2,781

Finished goods
7,430

 
8,986

Packaging materials
893

 
627

Promotional merchandise
1,413

 
1,531

Pub food, beverages and supplies
651

 
632

 
$
18,276

 
$
18,971


Work in process is beer held in fermentation tanks prior to the filtration and packaging process.



7
Index

Note 5. Related Party Transactions

Transactions with Anheuser-Busch, LLC (“A-B”)
Transactions with A-B consisted of the following (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Gross sales to A-B
$
47,943

 
$
45,905

 
$
135,890

 
$
136,155

Margin fee paid to A-B, classified as a reduction of Sales
693

 
670

 
1,978

 
2,031

Inventory management and other fees paid to A-B, classified in Cost of sales
102

 
116

 
294

 
296


Amounts due to or from A-B were as follows (in thousands):

 
September 30,
2015
 
December 31,
2014
Amounts due from A-B related to beer sales pursuant to the A-B distributor agreement
$
12,960

 
$
7,846

Refundable deposits due to A-B
(2,429
)
 
(2,629
)
Amounts due to A-B for services rendered
(2,073
)
 
(1,821
)
Net amount due from A-B
$
8,458

 
$
3,396


Operating Leases
We lease our headquarters office space, restaurant and storage facilities located in Portland, Oregon, as well as the land and certain equipment, from two limited liability companies, both of whose members include our current Board Chair and a nonexecutive officer. Lease payments to these lessors were as follows (in thousands):

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2015
 
2014
 
2015
 
2014
$
30

 
$
31

 
$
90

 
$
95


We hold lease and sublease obligations for certain office space and the land underlying the brewery and pub location in Kailua-Kona, Hawaii, with a company whose owners include a shareholder who owns more than 5% of our common stock. The sublease contracts expire on various dates through 2020, with an extension at our option for two five-year periods. Lease payments to this lessor were as follows (in thousands):

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2015
 
2014
 
2015
 
2014
$
131

 
$
120

 
$
392

 
$
351


Note 6. Derivative Financial Instruments

Interest Rate Swap Contract
Our risk management objectives are to ensure that business and financial exposures to risk that have been identified and measured are minimized using the most effective and efficient methods to reduce, transfer and, when possible, eliminate such exposures. Operating decisions contemplate associated risks and management strives to structure proposed transactions to avoid or reduce risk whenever possible.

We have assessed our vulnerability to certain business and financial risks, including interest rate risk associated with our variable-rate long-term debt. To mitigate this risk, effective January 23, 2014, we entered into an interest rate swap contract with Bank of America, N.A. (“BofA”) for 75% of the Term Loan balance, to hedge the variability of interest payments associated with our variable-rate borrowings under our Term Loan with BofA. The current swap contract terminates on September 29, 2023, and had

8
Index

a total notional value of $7.6 million as of September 30, 2015. Through this swap agreement, we pay interest at a fixed rate of 2.86% and receive interest at a floating-rate of the one-month LIBOR, which was 0.20% at September 30, 2015. Since the interest rate swap hedges the variability of interest payments on variable rate debt with similar terms, it qualifies for cash flow hedge accounting treatment. As of September 30, 2015, unrealized net losses of $641,000 were recorded in Accumulated other comprehensive loss as a result of this hedge. The effective portion of the gain or loss on the derivative is reclassified into Interest expense in the same period during which we record Interest expense associated with the Term Loan. There was no hedge ineffectiveness during the first three quarters of 2015 or 2014.

The fair value of our derivative instrument is as follows (in thousands):

Fair Value of Derivative Instrument
 
September 30,
2015
 
December 31,
2014
Fair value of interest rate swap
$
(641
)
 
$
(503
)
 
The effect of our interest rate swap contract that was accounted for as a derivative instrument on our Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2015 and 2014 was as follows (in thousands):

Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in Accumulated OCI (Effective Portion)
 
Location of Loss Reclassified
from Accumulated OCI into
Income (Effective Portion)
 
Amount of Loss Reclassified from Accumulated OCI into
Income (Effective Portion)
Three Months Ended
September 30,
 
 
 
 
 
 
2015
 
$
(188
)
 
Interest expense
 
$
52

2014
 
$
30

 
Interest expense
 
$
55

 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
2015
 
$
(137
)
 
Interest expense
 
$
156

2014
 
$
(340
)
 
Interest expense
 
$
151


See also Note 7.

Note 7. Fair Value Measurements

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

•
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
•
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
•
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following tables summarize liabilities measured at fair value on a recurring basis (in thousands):

Fair Value at September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap
 
$
—

 
$
(641
)
 
$
—

 
$
(641
)
 
 
 
 
 
 
 
 
 
Fair Value at December 31, 2014
 
 

 
 

 
 

 
 

Interest rate swap
 
$
—

 
$
(503
)
 
$
—

 
$
(503
)


9
Index

We did not have any assets measured at fair value on a recurring basis at September 30, 2015 or December 31, 2014.

The fair value of our interest rate swap was based on quarterly statements from the issuing bank. There were no changes to our valuation techniques during the third quarter of 2015.

We believe the carrying amounts of Cash, Accounts receivable, Other current assets, Accounts payable, Accrued salaries, wages and payroll taxes, and Other accrued expenses are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

We had fixed-rate debt outstanding as follows (in thousands):

 
September 30,
2015
 
December 31,
2014
Fixed-rate debt on balance sheet
$
705

 
$
1,456

Estimated fair value of fixed-rate debt
$
740

 
$
1,513


We calculate the estimated fair value of our fixed-rate debt using a discounted cash flow methodology. Using estimated current interest rates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt.

Note 8. Segment Results and Concentrations

Our chief operating decision maker monitors Net sales and gross margins of our Beer Related operations and our Pubs operations. Beer Related operations include the brewing operations and related beer sales of our Widmer Brothers, Redhook, Kona and Omission beer brands, as well as our Square Mile cider brand. Pubs operations primarily include our pubs, some of which are located adjacent to our Beer Related operations. We do not track operating results beyond the gross margin level or our assets on a segment level.

Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):

 
Three Months Ended September 30,
2015
Beer
Related
 
Pubs
 
Total
Net sales
$
46,940

 
$
7,749

 
$
54,689

Gross profit
$
15,633

 
$
1,226

 
$
16,859

Gross margin
33.3
%
 
15.8
%
 
30.8
%
 
 
 
 
 
 
2014
 

 
 

 
 

Net sales
$
44,663

 
$
7,410

 
$
52,073

Gross profit
$
13,447

 
$
1,198

 
$
14,645

Gross margin
30.1
%
 
16.2
%
 
28.1
%
 
 
 
 
 
 
 
Nine Months Ended September 30,
2015
Beer
Related
 
Pubs
 
Total
Net sales
$
133,727

 
$
21,202

 
$
154,929

Gross profit
$
43,914

 
$
2,797

 
$
46,711

Gross margin
32.8
%
 
13.2
%
 
30.1
%
 
 
 
 
 
 
2014
 

 
 

 
 

Net sales
$
132,520

 
$
20,065

 
$
152,585

Gross profit
$
42,153

 
$
2,906

 
$
45,059

Gross margin
31.8
%
 
14.5
%
 
29.5
%
 

10
Index

The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and, therefore, no asset by segment information is provided to our chief operating decision maker.

In preparing this financial information, certain expenses were allocated between the segments based on management estimates, while others were based on specific factors such as headcount. These factors can have a significant impact on the amount of Gross profit for each segment. While we believe we have applied a reasonable methodology, assignment of other reasonable cost allocations to each segment could result in materially different segment Gross profit.

Sales to wholesalers through the A-B Distributor Agreement represented the following percentage of our Sales:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
2015
 
2014
 
2015
 
2014
80.8
%
 
81.0
%
 
80.8
%
 
82.0
%
 
Receivables from A-B represented the following percentage of our Accounts receivable balance:
 
September 30,
2015
 
December 31,
2014
69.2
%
 
66.8
%

Note 9. Significant Stock-Based Plan Activity and Stock-Based Compensation

Stock-Based Compensation Expense
Stock-based compensation expense was recognized in our Consolidated Statements of Operations as follows (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Selling, general and administrative expense
$
254

 
$
320

 
$
810

 
$
720

Cost of sales
21

 
41

 
70

 
85

Total stock-based compensation expense
$
275

 
$
361

 
$
880

 
$
805


At September 30, 2015, we had total unrecognized stock-based compensation expense of $2.2 million, which will be recognized over the weighted average remaining vesting period of 3.0 years.

Note 10. Earnings Per Share

The following table reconciles shares used for basic and diluted earnings per share ("EPS") and provides other information (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Weighted average common shares used for basic EPS
19,171

 
19,052

 
19,144

 
19,019

Dilutive effect of stock-based awards
9

 
51

 
27

 
67

Shares used for diluted EPS
19,180

 
19,103

 
19,171

 
19,086

 
 
 
 
 
 
 
 
Stock-based awards not included in diluted per share calculations as they would be antidilutive (in thousands)
275

 
144

 
223

 
79




11
Index

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, 2014 (“2014 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 2014 Annual Report. The discussion and analysis includes period-to-period comparisons of our financial results. Although period-to-period comparisons may be helpful in understanding our financial results, we believe that they should not be relied upon as an accurate indicator of future performance.

Overview

Craft Brew Alliance is a leading craft brewing company that brews, brands and markets some of the world’s most respected and best-loved American craft beers.

We are home to three of the earliest pioneers in craft beer: Redhook Ale Brewery, Washington’s largest craft brewery, founded in 1981; Widmer Brothers Brewing, Oregon’s largest craft brewery, founded in 1984; and Kona Brewing Company, Hawaii’s oldest and largest craft brewery, founded in 1994. As part of Craft Brew Alliance, these craft brewing legends have expanded their reach across the U.S. and more than 15 international markets.

In addition to growing and nurturing distinctive brands rooted in local heritage, Craft Brew Alliance is committed to developing innovative new category leaders, such as Omission Beer, which is the #1 beer in the gluten-free beer segment, and Square Mile Cider, a tribute to the early American settlers who purchased the first plots of land in the Pacific Northwest.

Publicly traded on NASDAQ under the ticker symbol BREW, Craft Brew Alliance is headquartered in Portland, Oregon and operates five breweries and five pub restaurants across the U.S.

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; and one brewery in Memphis, Tennessee owned by our brewing partner. 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. Kona, Redhook and Widmer Brothers beers are distributed in all 50 states. Omission Beer continues to expand into new markets in the U.S. and internationally, while Square Mile Cider is currently available in 12 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 domestic and international sales, of craft beers and ciders from our breweries. 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.


12
Index

Following is a summary of our financial results:
Nine Months Ended September 30,
 
Net sales
 
Net income
 
Number of
Barrels Sold
2015
 
$154.9 million
 
$1.0 million
 
626,600
2014
 
$152.6 million
 
$2.4 million
 
632,400

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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Sales
106.9
 %
 
107.3
 %
 
107.0
 %
 
107.2
 %
Less excise taxes
(6.9
)
 
(7.3
)
 
(7.0
)
 
(7.2
)
Net sales
100.00

 
100.0

 
100.00

 
100.0

Cost of sales
69.2

 
71.9

 
69.9

 
70.5

Gross profit
30.8

 
28.1

 
30.1

 
29.5

Selling, general and administrative expenses
28.3

 
26.0

 
28.9

 
26.8

Operating income
2.5

 
2.1

 
1.3

 
2.8

Interest expense
(0.3
)
 
(0.2
)
 
(0.3
)
 
(0.2
)
Other income (expense), net
0.0

 
(0.1
)
 
0.0

 
0.0

Income before income taxes
2.2

 
1.8

 
1.0

 
2.5

Income tax expense
0.9

 
0.7

 
0.4

 
1.0

Net income
1.3
 %
 
1.1
 %
 
0.6
 %
 
1.5
 %

(1)
Percentages may not add due to rounding.


13
Index

Segment Information
Net sales, Gross profit and gross margin information by segment was as follows (dollars in thousands):
 
 
Three Months Ended September 30,
2015
Beer
Related
 
Pubs
 
Total
Net sales
$
46,940

 
$
7,749

 
$
54,689

Gross profit
$
15,633

 
$
1,226

 
$
16,859

Gross margin
33.3
%
 
15.8
%
 
30.8
%
 
 
 
 
 
 
2014
 

 
 

 
 

Net sales
$
44,663

 
$
7,410

 
$
52,073

Gross profit
$
13,447

 
$
1,198

 
$
14,645

Gross margin
30.1
%
 
16.2
%
 
28.1
%
 
 
 
 
 
 
 
Nine Months Ended September 30,
2015
Beer
Related
 
Pubs
 
Total
Net sales
$
133,727

 
$
21,202

 
$
154,929

Gross profit
$
43,914

 
$
2,797

 
$
46,711

Gross margin
32.8
%
 
13.2
%
 
30.1
%
 
 
 
 
 
 
2014
 

 
 

 
 

Net sales
$
132,520

 
$
20,065

 
$
152,585

Gross profit
$
42,153

 
$
2,906

 
$
45,059

Gross margin
31.8
%
 
14.5
%
 
29.5
%
 
Sales by Category
The following table sets forth a comparison of sales by category (dollars in thousands):

 
 
Three Months Ended September 30,
 
Dollar
 
 
Sales by Category
 
2015
 
2014
 
Change
 
% Change
A-B and A-B related
 
$
47,250

 
$
45,235

 
$
2,015

 
4.5
 %
Contract brewing and beer related(1)
 
3,461

 
3,226

 
235

 
7.3
 %
Excise taxes
 
(3,771
)
 
(3,798
)
 
27

 
(0.7
)%
Net beer related sales
 
46,940

 
44,663

 
2,277

 
5.1
 %
Pubs(2)
 
7,749

 
7,410

 
339

 
4.6
 %
Net sales
 
$
54,689

 
$
52,073

 
$
2,616

 
5.0
 %
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
Dollar
 
 
Sales by Category
 
2015
 
2014
 
Change
 
% Change
A-B and A-B related
 
$
133,912

 
$
134,124

 
$
(212
)
 
(0.2
)%
Contract brewing and beer related(1)
 
10,603

 
9,427

 
1,176

 
12.5
 %
Excise taxes
 
(10,788
)
 
(11,031
)
 
243

 
(2.2
)%
Net beer related sales
 
133,727

 
132,520

 
1,207

 
0.9
 %
Pubs(2)
 
21,202

 
20,065

 
1,137

 
5.7
 %
Net sales
 
$
154,929

 
$
152,585

 
$
2,344

 
1.5
 %

(1)
Beer related includes international beer sales.
(2)
Pubs sales include sales of promotional merchandise and sales of beer directly to customers.

14
Index


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

Three Months Ended September 30,
 
2015 Shipments
 
2014 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions(1)
A-B and A-B related
 
200,800

 
198,300

 
2,500

 
1.3
 %
 
0
%
Contract brewing and beer related(2)
 
16,100

 
13,700

 
2,400

 
17.5
 %
 
 

Pubs
 
3,100

 
3,300

 
(200
)
 
(6.1
)%
 
 

Total
 
220,000

 
215,300

 
4,700

 
2.2
 %
 
 

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2015 Shipments
 
2014 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions(1)
A-B and A-B related
 
571,000

 
584,000

 
(13,000
)
 
(2.2
)%
 
0
%
Contract brewing and beer related(2)
 
47,600

 
40,000

 
7,600

 
19.0
 %
 
 

Pubs
 
8,000

 
8,400

 
(400
)
 
(4.8
)%
 
 

Total
 
626,600

 
632,400

 
(5,800
)
 
(0.9
)%
 
 


(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 September 30, 2015 compared to the same period of 2014 was primarily due to an increase in shipments, an increase in pricing and a shift in package mix from draft to packaged, which has a higher selling price per barrel than draft. The increase in shipments was due to the continued successful focus on national distribution of Kona and Omission, partially offset by lower shipments of Redhook and Widmer brands where the focus has shifted to the home markets.

The decrease in sales to A-B and A-B related in the nine-month period ended September 30, 2015 compared to the same period of 2014 was primarily due to reductions in our wholesaler inventory levels in the first quarter of 2015. During the same period of 2014, wholesalers were building inventory levels in response to low levels at the end of 2013. The decrease in sales was partially offset by an increase in pricing and a shift in package mix from draft to packaged, which has a higher selling price per barrel than draft.

The increases in Contract brewing and beer related sales in the three­- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to increases in international shipments of our beers, which sell at a higher rate per barrel than contract brewing sales, as we expanded into additional countries, as well as increases in our contract brewing sales.

Pubs sales increased in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014, primarily as a result of higher guest counts at both of our pubs in Hawaii. The Hawaii pubs also have higher revenue per guest than the Redhook and Widmer Brothers pubs, which additionally experienced lower guest counts at the Portland and Woodinville locations. The increases in pub sales in the nine months ended September 30, 2015 were partially offset by the closure of the Redhook Pub in Portsmouth, New Hampshire for seven days due to inclement weather, closure of our Kona Pub on the island of Oahu for three weeks for a full remodel in the first quarter of 2015, and the decrease in beer shipment volume through our Pubs.

Excise taxes vary directly with the volume of beer shipped.


15
Index

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

Three Months Ended September 30,
 
2015 Shipments
 
2014 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
Kona
 
97,800

 
79,700

 
18,100

 
22.7
 %
 
16
 %
Redhook
 
48,500

 
55,500

 
(7,000
)
 
(12.6
)%
 
(15
)%
Widmer Brothers
 
50,800

 
56,100

 
(5,300
)
 
(9.4
)%
 
(9
)%
Omission
 
14,600

 
13,600

 
1,000

 
7.4
 %
 
7
 %
Total(1)
 
211,700

 
204,900

 
6,800

 
3.3
 %
 
0
 %
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2015 Shipments
 
2014 Shipments
 
Increase
(Decrease)
 
%
Change
 
Change in
Depletions
Kona
 
266,000

 
234,400

 
31,600

 
13.5
 %
 
13
 %
Redhook
 
143,000

 
167,600

 
(24,600
)
 
(14.7
)%
 
(13
)%
Widmer Brothers
 
149,200

 
162,600

 
(13,400
)
 
(8.2
)%
 
(6
)%
Omission
 
40,300

 
37,800

 
2,500

 
6.6
 %
 
14
 %
Total(1)
 
598,500

 
602,400

 
(3,900
)
 
(0.6
)%
 
0
 %

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

The increases in our Kona brand shipments in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to increases in shipments of Big Wave Golden Ale and Island Hopper variety pack, and the reintroduction of Pipeline Porter during the third quarter of 2015. The increase in the nine-month period ended September 30, 2015 was partially offset by decreases in Koko Brown.

The decreases in our Redhook brand shipments in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to decreases in our KCCO series, a craft beer brand developed in partnership with theChive, a photo entertainment website, Audible Ale, ESB and Longhammer IPA.

The decreases in our Widmer Brothers brand shipments in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to decreases in Okto Festival Ale, Hefeweizen draft and Alchemy Ale, partially offset by the summer seasonal which switched to Hefe Shandy from Citra Blonde. The decrease in the nine-month period ended September 30, 2015 was partially offset by an increase in Hefeweizen packaged beer which has benefited from the introduction of the new Hefeweizen packaging in collaboration with the Portland Timbers.

The increases in our Omission brand shipments in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to the continued success of, and demand for, the IPA, Lager and Pale Ale styles.


16
Index

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
 
2015
 
2014
September 30,
 
Shipments
 
% of Total
 
Shipments
 
% of Total
Draft
 
49,800

 
23.5
%
 
52,700

 
25.7
%
Packaged
 
161,900

 
76.5
%
 
152,200

 
74.3
%
Total
 
211,700

 
100.0
%
 
204,900

 
100.0
%
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
2015
 
2014
September 30,
 
Shipments
 
% of Total
 
Shipments
 
% of Total
Draft
 
139,700

 
23.3
%
 
151,400

 
25.1
%
Packaged
 
458,800

 
76.7
%
 
451,000

 
74.9
%
Total
 
598,500

 
100.0
%
 
602,400

 
100.0
%

The shifts in package mix from draft to packaged in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily the result of our Kona brand family becoming a larger share of our overall shipments by brand family, which is more heavily weighted to packaged sales, and the growth of Omission, which is only available in packaged.

Cost of Sales
Cost of sales includes purchased raw and component materials, direct labor, overhead and distribution costs.

Information regarding Cost of sales was as follows (dollars in thousands):

 
Three Months Ended September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
Beer Related
$
31,307

 
$
31,216

 
$
91

 
0.3
 %
Pubs
6,523

 
6,212

 
311

 
5.0
 %
Total
$
37,830

 
$
37,428

 
$
402

 
1.1
 %
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
Beer Related
$
89,813

 
$
90,367

 
$
(554
)
 
(0.6
)%
Pubs
18,405

 
17,159

 
1,246

 
7.3
 %
Total
$
108,218

 
$
107,526

 
$
692

 
0.6
 %

The increase in Beer Related Cost of sales in the three-month period ended September 30, 2015 compared to the same period of 2014 was primarily due to the increase in shipment volume and the mix shift from draft to packaged beers, as the cost per barrel of packaged beer is higher than draft. The increase in Cost of sales was partially offset by more favorable distribution costs per barrel and decreases in our cost of component materials.

The decrease in Beer Related Cost of sales in the nine-month period ended September 30, 2015 compared to the same period of 2014 was primarily due to more favorable distribution costs per barrel, the decrease in shipment volume and decreases in our cost of component materials. The decrease in Cost of sales was partially offset by an increase in brewery costs per barrel at our owned breweries, and the mix shift from draft to packaged beers, as the cost per barrel of packaged beer is higher than draft.

Pubs Cost of sales increased in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014, primarily due to increases in Sales and employee-related costs. The increase in the nine-month period ended September 30, 2015, is also due to additional labor costs relating to training and overhead following the closure of our Kona Pub on the island of Oahu for three weeks for a full remodel in the first quarter of 2015.
                         

17
Index

Capacity utilization is calculated by dividing total shipments from our owned breweries by the approximate working capacity of these breweries and was as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Capacity utilization
75
%
 
75
%
 
72
%
 
77
%

In anticipation of initiating full-scale brewing with our brewing partner in Memphis, Tennessee in June 2014, we intentionally increased production during the second quarter of 2014 at our owned breweries, which contributed to the higher utilization rate for the nine-month period ended September 30, 2014. This partnership provides us scalable capacity and we anticipate producing up to 100,000 barrels at this location in 2015.

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

 
Three Months Ended September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
Beer Related
$
15,633

 
$
13,447

 
$
2,186

 
16.3
 %
Pubs
1,226

 
1,198

 
28

 
2.3
 %
Total
$
16,859

 
$
14,645

 
$
2,214

 
15.1
 %
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
Beer Related
$
43,914

 
$
42,153

 
$
1,761

 
4.2
 %
Pubs
2,797

 
2,906

 
(109
)
 
(3.8
)%
Total
$
46,711

 
$
45,059

 
$
1,652

 
3.7
 %

Gross profit as a percentage of Net sales, or gross margin, was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Beer Related
33.3
%
 
30.1
%
 
32.8
%
 
31.8
%
Pubs
15.8
%
 
16.2
%
 
13.2
%
 
14.5
%
Overall
30.8
%
 
28.1
%
 
30.1
%
 
29.5
%
 
The increases in Gross profit in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to lower distribution costs per barrel, favorable pricing increases, and decreases in our component materials costs. In the nine-month period ended September 30, 2015, the increase in Gross profit was partially offset by an increase in brewery costs per barrel at our owned breweries.

The increases in the Beer Related gross margin in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to lower distribution costs per barrel, favorable pricing increases, and decreases in our component materials costs. The increases were partially offset by higher brewery costs per barrel, as well as the mix shift from draft to packaged beers.

The decreases in the Pubs gross margin in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to higher employee related costs, as well as lower guest counts in the Portland and Woodinville pubs. The decrease in the Pubs gross margin in the nine-month period ended September 30, 2015 was also due to additional labor costs relating to training and overhead following the closure of our Kona Pub on the island of Oahu for three weeks for a full remodel in the first quarter of 2015.


18
Index

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
September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
 
$
15,497

 
$
13,554

 
$
1,943

 
14.3
%
As a % of Net sales
28.3
%
 
26.0
%
 
 

 
 

 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
Dollar
 
 
 
2015
 
2014
 
Change
 
% Change
 
$
44,713

 
$
40,824

 
$
3,889

 
9.5
%
As a % of Net sales
28.9
%
 
26.8
%
 
 
 
 

The increases in SG&A for the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to increases in employee-related costs, as well as planned increases in sales and marketing spending. SG&A increased as a percentage of Net sales in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 primarily due to the deceleration in Net sales while maintaining the planned increases in SG&A expense.

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

Three Months Ended
September 30,
 
Dollar
 
 
2015
 
2014
 
Change
 
% Change
$
148

 
$
111

 
$
37

 
33.3
%
 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
Dollar
 
 
2015
 
2014
 
Change
 
% Change
$
419

 
$
317

 
$
102

 
32.2
%

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Average debt outstanding
$
17,957

 
$
12,152

 
$
18,953

 
$
11,826

Average interest rate
2.13
%
 
1.85
%
 
1.85
%
 
1.88
%

The increases in Interest expense in the three- and nine-month periods ended September 30, 2015 compared to the same periods of 2014 were primarily due to the increase in our average debt outstanding. Our average debt outstanding increased as we have borrowed on our line of credit facility to support our expansion and growth plans, and to fund our working capital needs.

Income Tax Provision
Our effective income tax rate was 40.0% for the first nine months of 2015 and 39.0% in the first nine months of 2014. The effective income tax rates reflect the impact of non-deductible expenses (primarily meals and entertainment expenses), state and local taxes, tax credits, and income excluded from taxation under the domestic production activities exclusion.


19
Index

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 October 1, 2015 primarily from cash flows generated from operations and borrowing under our line of credit facility as the need arises. Capital resources available to us at September 30, 2015 included $1.8 million of Cash and cash equivalents and $16.1 million available under our line of credit facility.

At September 30, 2015 and December 31, 2014, we had $10.8 million and $8.0 million of working capital, respectively, and our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 12.5% and 11.4%, respectively.

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

 
Nine Months Ended
September 30,
 
2015
 
2014
Net cash provided by operating activities
$
8,302

 
$
10,698

Net cash used in investing activities
(9,362
)
 
(12,700
)
Net cash provided by financing activities
1,895

 
745

Increase (decrease) in Cash and cash equivalents
$
835

 
$
(1,257
)

Cash provided by operating activities of $8.3 million in the first nine months of 2015 resulted from our Net income of $1.0 million, net non-cash expenses of $8.4 million and changes in our operating assets and liabilities as discussed in more detail below.

Accounts receivable, net, increased $7.0 million to $18.7 million at September 30, 2015 compared to $11.7 million at December 31, 2014. This increase was primarily due to the timing of shipments and a $5.1 million increase in our receivable from A-B, which totaled $13.0 million at September 30, 2015. Historically, we have not had collection problems related to our accounts receivable.

Inventories decreased $0.7 million to $18.3 million at September 30, 2015 compared to $19.0 million at December 31, 2014. The decrease from December 31, 2014 is due to the timing of shipments in the third quarter of 2015.

Accounts payable increased $4.4 million to $17.4 million at September 30, 2015 compared to $13.0 million at December 31, 2014, primarily due to timing of payments related to capital expenditures, raw and component materials and marketing.

As of September 30, 2015, 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 $31,000, tax-effected; and
•
federal alternative minimum tax (“AMT”) credit carry forwards of $305,000.

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 $9.8 million in the first nine months of 2015 were primarily directed to beer production capacity and efficiency improvements and Pubs remodeling. As of September 30, 2015, we had an additional $1.9 million of expenditures recorded in Accounts payable on our Consolidated Balance Sheets, compared to $0.6 million at December 31, 2014. We anticipate capital expenditures of approximately $16 million to $19 million in 2015 primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail. Beginning in 2015, we will be investing approximately $10 million in our Oregon Brewery to expand capacity to 750,000 barrels per year, with expected completion in the first half of 2017. Also beginning in 2015 through expected  completion in early 2017, we will be investing approximately $15 million in a new Hawaiian Brewery to expand capacity to 100,000 barrels per year. Both of these projects are included in the anticipated capital expenditures of $16 million to $19 million in 2015. We also anticipate total capital expenditures of $17 million to $21 million in 2016, including spending for the expansion projects.

We have a loan agreement (as amended, the “Loan Agreement”) with Bank of America, N.A., which consists 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

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letters of credit, and a $10.1 million term loan (“Term Loan”). We may draw upon the Line of Credit for working capital and general corporate purposes until expiration on October 31, 2018. The maturity date of the Term Loan is September 30, 2023. At September 30, 2015, we had $5.9 million of borrowings outstanding under the Line of Credit and $10.1 million outstanding under the Term Loan.

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 2014 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, 2014.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2014 Annual Report on Form 10-K, which was filed with the SEC on March 4, 2015.

Item 4. Controls and Procedures

Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. While reasonable assurance is a high level of assurance, it does not mean absolute assurance. Disclosure controls and internal control over financial reporting cannot prevent or detect all errors, misstatements or fraud. In addition, the design of a control system must recognize that there are resource constraints, and the benefits associated with controls must be proportionate to their costs.


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Changes in Internal Control Over Financial Reporting
During the third quarter of 2015, no changes in our internal control over financial reporting were identified in connection with the evaluation required by Exchange Act Rule 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A. Risk Factors

There have been no changes in our reported risk factors and no new risk factors have been identified since the filing of our 2014 Annual Report on Form 10-K, which was filed with the SEC on March 4, 2015.

Item 6. Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

31.1
Certification of Chief Executive Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
31.2
Certification of Chief Financial Officer of Craft Brew Alliance, Inc. pursuant to Exchange Act Rule 13a-14(a)
32.1
Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
99.1
Press Release dated November 4, 2015
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CRAFT BREW ALLIANCE, INC.
 
 
 
 
 
November 4, 2015
BY: 
/s/ Joseph K. Vanderstelt
 
 
 
Joseph K. Vanderstelt
 
 
 
Chief Financial Officer
 

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