Financial Performance of Craft Brew Alliance Inc - Essay Example

Project: Financial Report review of Craft Brew Alliance Inc. School Background Using recent research and surveys, it seems obvious that the beer industry is growing at a good speed. Generally, parties and others moments of joy are celebrated with sufficient amount of beer and wine. The western countries and some eastern also use these in sufficient amount. Since, consumer demands a good quality product, every company tries to provide the same as well as keep the price in the range of existing customers. One such company is the Craft Brew Alliance (BREW) that distributes its bred beer nationwide. This company is showing significant growth in its popularity. In 2011, its beer market I US was approximately $96 billion which shows a down of 1% compared to 2010. However, its net sales show a significant growth of 13.3% showing its success in capturing market share. BREW is now investing heavily in growth.1 Three creative beer making brands are owned by BREW. They always engage in the mixture and make of new beers and they attain even their own seasonal beers available only during their respective seasons. The company owns five brew-pub restaurants giving the company customer awareness that contributes highly to research and development. These restaurants help the company to keep in touch continuously with customers creating a good sense of brand loyalty. Company summary Industry Brewing of beers of different brands owned Founded 2008 Headquarters Washington, United States Area Served Nationwide Key People Terry E. Michaelson (Chief Executive Officer), Joseph K. O’Brien (Controller and Chief Accounting Officer), Kurt R. Widmer (Chairman of the Board and Director), Mark D. Moreland (Chief Financial Officer), Products Beers and wines Services Brew-pup restaurants Revenue $169.3 millions Operating income $5.1 millions Profit $2.5 millions Total assets $165.7 millions Total equity $108.1 millions Employees 740 approx. Website www.craftbrew.com A. Introduction Name of the chief Executive officer: Terry E. Michaelson. Location of the Home office: 929 North Russell Street, Portland, Oregon. Ending date of latest fiscal year: December 31, 2012. Name of the company’s independent accountants (auditors): Moss Adams, LLP: The most recent price of the company’s stock and its dividend per share: 108.75 Dollars per share of Craft Brew stock 10 Dollars annual dividend per share overall and 6.36 Dollars in 2012 B. Industry Situation and Company Plans The industry the company is operating in is highly competitive and needs very hard work to have success in. Craft Brew competes in both the craft brewing market and in significantly larger alcoholic beverage markets well. This market encompasses imported and domestic beers, spirits, flavored alcohol beverages, ciders and wine. The competition in the specialty beer market and the domestic craft beer segment is based on taste, product quality, freshness and consistency, ability to differentiate products, product support and promotional methods, local appeal, distribution coverage and price. By the proliferation of the small craft brewers, also including the contract brewers, and the significant amount of products that such brewers offer, the craft beer segment has got increasingly competitive. Further, the craft brewers have also challenged us with more competition due to their peers expand distribution. Different regional markets are also means of varying competition. The company is also in competition against imported brands’ producers, such as Corona Extra, Heineken and Guinness. Most of such foreign brewers have got financial resources significantly greater than the company has. Although the imported beers account for a better share of the beer market in U.S. compared to craft beers currently, Craft Brew still believe that it, over some importers, have the possession of many competitive advantages such as lower transportation costs, eligibility for lower federal excise taxes, familiarity with and proximity to local consumers, a higher degree of product freshness, no importation costs and the absence of currency fluctuations. Business Strategy The company’s consumer mission focuses on satisfaction of more consumers, in more locations, at more times, through distinct, more authentic craft beer and brands than any other competitor does. Business strategy’s central elements include: The company believes in itself to leverage its national sales and marketing capabilities and that the complementary brand families in creating a unique identity with the consumer and in the distribution channel. The company has invested in such technologies that allow it not only to focus its product and brand families offerings on those regions and markets representing the best opportunities, but also measure what those efforts have resulted in. the company’s sales force is structured to have the ability to call on all national retail channels, including drug, grocery and convenience stores, where most of the craft brewers cannot do so. Craft Brew distributes its beers to its retailers by independent wholesalers aligned with the A-B distribution network. The A-B Distributor Agreement pursues these sales. Establishment of relations with these wholesalers throughout the nation was initially allowed by the company’s agreement with A-B. This agreement with A-B distributors resulted in the company’s belief to be sure that these wholesalers have, under the alcohol beverages laws, the exclusive rights in distribution of the company’s beer in their respective markets in majority of states in case the agreement with A-B distributers is terminated or is it expires. This footprint for distribution offers efficiencies in product delivery and logistics, state reporting and licensing and billing and collections. Craft Brew has realized such efficiencies with maintaining full autonomy over the sale, production and marketing of its products as an independent company. The company’s breweries are located both in Hawaii and on coasts allowing the company to brew and distribute its beers efficiently. The company prefers owning and operating its breweries for optimization of the quality and consistency of its products and achieving greater control over the production costs of the company. The company knows and believes that it is critical to its success to maximize the production under its direct ownership and through the selection of expert and accomplished partners. The company further realizes that controlling its product quality and engaging in ongoing innovation of products will provide it a competitive advantage. C. Financial Statements Income Statement: Since the format of Craft Brew Alliance Inc. shows a series of steps for arrival at income, therefore it seems to be in a multistep format. Amounts in thousands of Dollars 2012 2011 Change in 2012 Gross Profit 50026 45186 11% Income from operations 5136 5444 +308 Net income 2526 9651 -7125 Balance Sheet: Amounts in thousands of Dollars Assets Liabilities Stockholder’s Equity 2012 165664 57669 108195 2011 158908 54399 104509 Statement of cash flows Amounts in thousands of Dollars Net income Cash flow from operations Difference 2012 2526 13105 10569 2011 9651 6728 2923 Amounts in thousands of Dollars Cash and Cash Equivalents 2012 2011 2010 5013 795 164 D. Accounting Policies Critical Accounting Policies and Estimates The basis of the company’s financial statements is to choose and apply significant accounting policies that make assumptions and significant estimates required by the management. The application of policies affected by these uncertainties and Judgments may materially differ in result in amounts being reported using different assumptions or under different conditions. The basis of the company’s estimates is upon financial forecasts and market trends and projections, historical experience, and upon various types of other assumptions that are reasonable in the opinion of management under the circumstances in various cases. From the company’s estimates the Actual results may be different, potentially significantly. Goodwill The company record Goodwill when the estimated fair value of the net identified tangible and intangible assets is exceeded by the purchase price paid for an acquisition acquired. On the basis of existing operations and relative fair value of the future benefit of the purchase all of the goodwill has been specified to the company’s Beer Related reporting unit. The company’s reporting units may be an operation one level below an operating segment or operating segments as a whole, called as a component. On December 31 of each year the company conducts an annual impairment assessment, or if indicators of potential impairment exist the company performs more frequently, for the determination of a reporting unit whether there are more chances that the carrying value is higher than fair value in which goodwill resides. If the assessments for reporting units conclude that there are more chances that the carrying value is higher than fair value, Craft Brew doesn’t need to carry out the test of two-step goodwill impairment as goodwill does not show any impairment. Qualitative factors used in this determination include, but does not limit to, industry conditions, macroeconomic conditions, changes in the market for the company’s products and services, the competitive environment, political developments and regulatory, and entity specific factors such as financial performance and strategies. Where impairment assessment for reporting units concludes that there are more chances that the carrying value is higher than the fair value, the first step of the goodwill impairment test is performed, for a purpose that it compares the fair value of the reporting unit to its carrying value. If the fair value is less than the carrying value, Craft Brew determines the implied fair value of goodwill in the second step, for the purpose of comparing it with the carrying amount to calculate if an impairment loss is recorded. The company uses a combination of income approach and market capitalization, valuation methods, for the estimation of the fair value of the reporting units. The assumptions and significant estimates which are used by management in determining the recoverability of goodwill are estimated growth of the overall craft beer segment, present value discount rate, estimated future cash flows, and other factors. An impairment charge could be the result if the estimated future cash flows of the company’s company declined significantly. Management’s subjective judgment is required on the estimates of future cash flows, reasonably based on projections and supportable assumptions. Indefinite-Lived Intangible Assets The company reviews its intangible assets that have indefinite useful lives annually for impairment and whenever there are events or changes indicating possibility of non-recoverability of the carrying value. These assets comprised primarily of the company’s domain name, trademarks and recipes the company conclude, for indefinite-lived intangible assets, there are more chances that the carrying value is less than the fair value and requires testing no more. Tests are made for the recoverability of those assets, for which the company do not conclude that there are more chances for the fair value to be higher than the carrying value. The company compares the future discounted cash flows that are expected to be generated by the assets to the carrying amount of the asset for the recovery of indefinite-lived intangible assets. The asset, if determined, is impaired, any of the amount of impairment is measured as the difference between the fair value of the impaired asset and the carrying value. No requirement is there for us to conduct for the company’s annual impairment test a qualitative assessment and may instead perform the quantitative test and bypass the qualitative assessment. The estimates and assumptions used to determine the remaining useful lives and future values of the company’s intangibles are complex and subjective. Many factors can affect them, with the inclusion of external factors such as economic trends and industry, and internal factors such as changes in the company’s forecasts for specific product lines and the company’s business strategy. Long-Lived Asset Impairment Potential impairment of the company’s long-lived assets is evaluated whenever circumstances and facts indicate that there may have occurred impairment in the carrying values of such long-lived assets may be impaired. These assets include the company’s non-compete agreements, distributor agreements and other intangible assets, In these cases, the company makes an evaluation of recoverability by comparing the future projected undiscounted cash flows and by preparing other qualitative and quantitative analyses to the carrying value of the assets. On a signal that the carrying value of some of the assets may not be recoverable, during the current period the company recognizes an impairment loss. The company, during 2012, 2011 or 2010, did not identify signals of impairment. Refundable Deposits on Kegs Owned by us the company’s draft beer in kegs is distributed by the company, as well as in kegs, on lease, from third parties. Kegs owned by us are considered as a part of Property, leasehold improvements and equipment in the company’s Consolidated Balance Sheets at cost and depreciation is made over the estimated useful life of the keg. In the company’s Consolidated Balance Sheets, when draft beer is shipped to the wholesaler, without any intention towards the keg whether it is leased or owned, the company collect deposit which are refundable, and are considered as a current liability. The deposit is refunded to the wholesaler, when the keg is returned by the wholesaler. If a wholesaler does not return some of the company’s kegs for which it is responsible, it forfeits its deposit and pays the company a fixed fee for each keg resulted from loss. The company is having an experience of loss of kegs and is anticipating that in future periods some loss will occur due to the significant volume of kegs carried by each retailer and wholesaler, the similarities between kegs owned by the relatively low deposit, and most brewers are collected on each keg when the comparison was made with the market value of the keg. The company believes that this issue is industry-wide and the experience of the company’s loss is example of the industry. The company periodically uses internal records for a view to estimate and calculate forfeited deposits connected to lost kegs. The estimates made during the period affect the amount recorded as refundable deposits and brewery equipment as at the consolidated financial statements date. For those deposits which are refundable the actual liability could differ from the estimates made by the company. Revenue Recognition Revenue is recognized from product sales, net of discounts, excise taxes and certain fees wet pay on must-pay basis on sales to members of the A-B wholesale distributor network, when the member receives the products. The members of A-B wholesale distributor network can be an independent wholesale distributor or a branch of A-B. Deferred Taxes The deferred tax assets are recognized for the tax benefit of amounts that are expensed for financial reporting purposes however not deducted yet for tax purposes and also arise from net operating loss carry forwards and unutilized tax credits. The company determines its deferred tax assets regularly to see if any valuation allowance is required. It is determined, to the extent, that the recoverability of deferred tax assets is not more likely than not, a valuation allowance will be recorded by the company against deferred tax assets. If the company remains unable in generating sufficient taxable income in future or its assessment that it is more likely than not that deferred tax assets recorded will be realized is not accurate, the company will incur charges in the future periods in order to record a valuation allowance on its gross deferred tax assets. Off-Balance Sheet Arrangements The company does not have any off-balance sheet arrangements that is having or are likely to have a material current or future effect on the company’s financial condition, revenue or expenses, results of operations, changes in financial condition, liquidity, capital resources or capital expenditures. Ratio Analysis Ratios 2012 2011 Comments and Significance Profitability Ratios Profit margin 1% 6% This ratio means the percentage of single sales dollar resulting in net income. This value has decreased significantly for 2012 compared to the previous year for Craft Brew Alliance Inc. In 2010, according to the ratio, the company has made, for each dollar of net sales, almost 1 cent. Asset turnover 1.04 0.91 The company was able to produce only 1 cent in sales for a dollar that was invested in assets. This is extremely low and the management of the company must have a look at using its acquired assets more efficiently in the future. Return on equity 2% 9% This ratio indicates what amount has the stockholders earned for making investment in Craft Brew Alliance Inc. The number has significantly fallen for 2012 and it is very much disappointing for the shareholders. Cash Flow Adequacy Ratios Free cash flow 0.18 0.27 This ratio says about the amount of cash that the company holds at its disposal after committing funds for continuation of operations at its planned level. Being positive, it is a good indicator assuring that the company was able to meet its cash commitments as planned and has availability of cash for reducing debt or expansion. Cash flows to sales 7% 4% The number of this ratio indicates that the company could produce positive cash flows to sales of 7% in 2012 which shows an improvement compared to previous year. This positive measure explains that the company succeeded to generate 7 cents in cash for each dollar of sales. Long-Term Solvency Ratios Debt to equity ratio 53% 52% Generally, a high debt/equity ratio shows a company’s aggressiveness in financing growth with the debt. Looking at this ratio, Craft Brew’s assets are financed a little more than half of by its creditors. Interest coverage 5.75 16.09 This ratio measures the protection of creditors from a default on interest payment. This measure got significantly worse in 2012 and hence, the Creditors would surely be uncomfortable to keep extending credit to the group. Liquidity Ratios Working capital 5207 2327 It shows a good increase for the current year and it looks healthier amount for continuing to obtain credit, buy inventory and finance expanded sales. Receivable turnover 14.20 12.52 This ratio indicates as to how many times the receivables were turned by the company into cash for the current year. The number shows an improvement in 2012 from 2011. Current ratio 1.19 1.09 Craft Brew Alliance Inc. has got 1.58 Dollars of current assets in return for 1 Dollar of current liabilities in 2012. The ratio got a bit better for this year however I feel it a little low and may be a good signal alerting that the company may not have the ability to pay its debts on due time. This risk should be considered by the management. Days’ sales uncollected 26 29 These numbers tell us that the company had to wait for 26 days on average for receipt of payment for its credit sales in 2012 showing a little improvement from the previous year. Inventory turnover 11.25 11.44 Craft Brew could turn over its inventory more than 11 times on average. This is a favorable measure for the company. Days’ inventory on hand 32 32 The company was able to turn over its inventory every 32 days in both 2012 and 2011. This is again a good measure for the company. Payables turnover 10.46 8.89 Accounts payable were paid more than 10 times on average within the accounting period indicating fair credit terms from the creditors. Operating cycle 23 20 The operating cycle of the company is very good though it increased a bit in 2012. It requires Craft Brew about 23 days selling its products and collecting for them. Days’ payable 35 41 For 2012, on average, it took about 35 days for the company paying its accounts payable again showing good terms with its Creditors. Market Strength Ratios Dividends yield 4.73% 5.17% As Craft Brew could not perform better in financial year in 2012, the yield remained lower compared to 2011. Price/earnings per share 3.71 6.36 Decrease of almost two times is evident from the ratio of earnings per share for 2012. This is not a good sign of the financial performance of the company. References Adam Gefvert, “Craft Brew Is Gearing Up For Growth” Retrieved from: http://seekingalpha.com/article/513391-craft-brew-is-gearing-up-for-growth Read More