Income from Equity Method Investments Discussion Paper
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Income from Equity Method Investments Discussion Paper
Selling, General and Administrative Expenses Selling, general and administrative expenses (“SG&A”) include compensation and related expenses for our sales and marketing activities, management, legal and other professional and administrative support functions.
Information regarding SG&A was as follows (dollars in thousands):
Year Ended December 31, Dollar 2012 2011 Change % Change $ 44,890 $ 39,742 $ 5,148 13.0% As a % of Net sales 26.5% 26.6%
Year Ended December 31, Dollar 2011 2010 Change % Change $ 39,742 $ 29,938 $ 9,804 32.7% As a % of Net sales 26.6% 22.7%
The increase in SG&A in 2012 compared to 2011 was primarily due to increases in labor costs as we expand our national footprint into new geographies and increased costs associated with the launch of our Omission and Big Wave brands. Our investments in sales and marketing are consistent with our strategic focus on firmly establishing our brands’ national footprint and competitively addressing the varied needs of craft beer consumers. These increases were partially offset by lower packaging design and development costs.
The increase in SG&A and SG&A as a percentage of Net sales in 2011 compared to 2010 was primarily due to an increase in sales and marketing costs, principally comprised of labor costs related to our national sales organization, packaging design and development, promotions and sponsorship activity, point of sale and related trade merchandise, and brand platform enhancements. Administrative costs associated with the operations acquired with the KBC Merger in October 2010 also contributed to the increase.
Income from Equity Method Investments Income from equity method investments included our share of FSB’s net income through the date of sale in May 2011 and our share of Kona’s net income through the date of the KBC Merger in October 2010. Since completion of the KBC Merger, Kona’s operating results have been included in our consolidated operating results.
Income from equity method investments was as follows (in thousands):
Year Ended December 31, 2012 2011 2010 FSB $ – $ 6 9 1 $ 6 9 6 Kona – – 146
Total $ – $ 6 9 1 $ 842
Gain on Sale of FSB Our pre-tax gain on the sale of FSB in 2011 totaled $10.4 million, which resulted from proceeds of $16.3 million less the investment in FSB of $5.9 million.
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Interest Expense Information regarding interest expense was as follows (dollars in thousands):
Year Ended December 31, Dollar 2012 2011 Change % Change Interest expense $ 663 $ 918 $ (255) (27.8)% 2011 2010 Interest expense $ 918 $ 1,497 $ (579) (38.7)%
Year Ended December 31, 2012 2011 2010 Average debt outstanding $ 13,436 $ 20,163 $ 24,236 Average interest rate 2.74% 3.43% 3.34%
The decrease in Interest expense in 2012 compared to 2011 was due to lower average outstanding borrowings and lower average interest rates. The average interest rates shown in the above table represent cash interest, exclusive of our interest rate swap. The decreases in average outstanding borrowings were primarily the result of using a portion of the proceeds from the sale of FSB in May 2011 to repay the $8.8 million outstanding on our line of credit and $4.2 million outstanding related to capital leases.
The decrease in interest expense in 2011 compared to 2010 was due to the expiration of a non-qualifying interest rate swap in the fourth quarter of 2010 and lower average outstanding borrowings. The increase in the average interest rate on outstanding borrowings was due to the reduction in the outstanding balance on lower interest rate debt during 2011, partially offset by modifications we negotiated with our primary lender in the latter part of 2010 as a result of our improved financial condition. The decrease in average outstanding borrowings was primarily the result of using a portion of the proceeds from the sale of FSB to repay the $7.5 million outstanding on our line of credit.
Income Tax Provision Our effective income tax rate was 43.6%, 38.5% and 39.5% in 2012, 2011 and 2010, respectively. The effective income tax rates reflect the impact of non- deductible expenses, primarily meals and entertainment, and state and local taxes and tax credits. The rate in 2012 reflects the impact of increasing the tax rate applied against the net deferred tax liability due to the State of California changing income apportionment rules to a single sales factor methodology effective January 1, 2013. This one-time adjustment resulted in a 3.4 percentage point increase to our 2012 effective income tax rate, or $153,000 of our Income tax provision.
The rate in 2010 also reflects non-deductible merger-related expenses and a $100,000 reduction to our valuation allowance during the second quarter of 2010. We made this reduction, eliminating the valuation allowance, due to the cumulative earnings generated and other evidence available to us regarding the potential of fully utilizing our outstanding net operating loss carryforwards.
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 flow from operations, bank borrowings and the sale of common and preferred stock. We anticipate meeting our obligations for the twelve months beginning January 1, 2013 primarily from cash flows generated from operations. In addition, we may borrow under our line of credit facility as the need arises. Capital resources available to us at December 31, 2012 included $5.0 million of Cash and $22.0 million available under our line of credit facility.
We had $5.0 million of Cash and $5.2 million of working capital at December 31, 2012. Our debt as a percentage of total capitalization (total debt and common shareholders’ equity) was 10.8% at December 31, 2012.
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Table of Contents A summary of our cash flow information was as follows (dollars in thousands):
Year Ended December 31, 2012 2011 2010 Cash flows provided by operating activities $ 13,105 $ 6,728 $ 10,798 Cash flows provided by (used in) investing activities (8,683) 7,131 (10,313) Cash flows used in financing activities (204) (13,228) (332)
Increase in cash $ 4,218 $ 631 $ 153
Cash provided by operating activities of $13.1 million in 2012 resulted from our Net income of $2.5 million, net non-cash expense of $8.7 million and changes in our operating assets and liabilities as discussed in more detail below.
Accounts receivable, net, decreased $2.8 million to $10.5 million at December 31, 2012 compared to $13.3 million at December 31, 2011. This decrease was primarily due to a $1.9 million decrease in our receivable from A-B, which totaled $6.4 million at December 31, 2012. Historically, we have not had collection problems related to our accounts receivable.
Inventories increased $2.3 million to $11.7 million at December 31, 2012 compared to $9.4 million at December 31, 2011, primarily to support an increase in shipment volume.
Accounts payable increased $1.3 million to $12.3 million at December 31, 2012 compared to $11.0 million at December 31, 2011, primarily due to increased inventory purchases to support our increased level of sales, partially offset by a $53,000 decrease in the portion of our payable to A-B that is included in Accounts payable, which totaled $1.4 million at December 31, 2012.
As of December 31, 2012, we had state net operating loss carryforwards (“NOLs”) available to offset payment of future income taxes of $73,000, tax-effected; and we had no federal NOLs remaining. We also had $609,000 in federal alternative minimum tax (“AMT”) credit carry forwards and federal insurance contributions act (“FICA”) credit carryforwards of $29,000 tax-effected.
We anticipate that we will utilize the remaining state 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 $9.1 million in 2012 were primarily for capacity, efficiency and cooperage purposes. For 2013, we anticipate capital expenditures of approximately $11 million to $13 million primarily for capacity and efficiency improvements, quality initiatives and restaurant and retail.
We have a loan agreement (as amended, the “Loan Agreement”) with BofA, which is presently comprised of a $22.0 million revolving line of credit (“Line of Credit”), including provisions for cash borrowings and up to $2.5 million notional amount of letters of credit, and a $11.8 million term loan (“Term Loan”). We may draw upon the Line of Credit for working capital and general corporate purposes. At December 31, 2012, we had no borrowings outstanding under the Line of Credit and we were in compliance with the financial covenants associated with the Loan Agreement.
Income from Equity Method Investments Discussion Paper
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