Redhook Ale Brewery Inc. Reports Operating Results (10-Q)
Redhook Ale Brewery Inc. has a market cap of $118.05 million; its shares were traded at around $6.9 with a P/E ratio of 62.73 and P/S ratio of 0.96. HOOK is in the portfolios of Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations: Since its formation, the Company has focused its business activities on the brewing, marketing and selling of craft beers in the United States. The Company reported gross sales and net income of $39.1 million and $376,000, respectively, for the three months ended September 30, 2010, an increase of 14.1% and 300.0%, respectively, as compared with gross sales and net income of $34.3 million and $94,000, respectively, for the corresponding period in 2009. The Company generated basic and fully-diluted earnings per share of $0.02 for the third quarter of 2010 compared with $0.01 per share for the corresponding period of 2009. The Company generated operating profit of $558,000 during the quarter ended September 30, 2010 compared with $588,000 during the quarter ended September 30, 2009, primarily due to an increase in selling, general and administrative expenses and merger-related expenses for the 2010 third quarter, partially offset by an increase in revenues for the third quarter of 2010 resulting from an increase in shipments and a higher average sales price, and an improved margin for the 2010 third quarter. The Companys sales volume (shipments) totaled 165,400 barrels in the third quarter of 2010 as compared with 149,500 barrels in the third quarter of 2009, an increase of 10.6%.
The Company reported gross sales and net income of $108.1 million and $2.3 million, respectively, for the first nine months ended September 30, 2010, an increase of 6.0% and 205.9%, respectively, compared with gross sales and net income of $101.9 million and $758,000, respectively, for the corresponding period in 2009. The Company generated basic and fully-diluted earnings per share of $0.14 for the first nine months of 2010 compared with $0.04 per share for the corresponding period of 2009. The Company generated operating profit of $4.1 million during the first nine months ended September 30, 2010 compared with $2.5 million during the corresponding period of 2009, primarily due to an increase in revenues resulting from an increase in shipments and a higher average sales price, and improved margin for the 2010 period, partially offset by an increase in selling, general and administrative expenses and merger-related expenses for the 2010 period. The Companys sales volume totaled 465,000 barrels in the first nine months of 2010 as compared with 445,700 barrels in the corresponding period of 2009, an increase of 4.3%.
As of the effective date, the Company acquired all outstanding shares of KBC common stock in exchange for aggregate consideration transferred of approximately $17.8 million as measured consistent with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, which was comprised of approximately $6.1 million in cash and the balance in the form of 1,677,000 shares of the Companys common stock (collectively the Merger Consideration). The value of the Merger Consideration as contemplated by the KBC Merger Agreement was $14.1 million, based on the value of the Company's common stock as established in the KBC Merger Agreement. The Merger Consideration is subject to adjustment based on final verification by the parties of the final balance sheet of KBC, including its working capital position, as of the effective date. The Company deposited 292,456 shares of common stock from the Merger Consideration in escrow in connection with indemnification provisions relating to claims that may be asserted in connection with breaches of representations and warranties made by KBC and its shareholders.
Companys estimated gross margin on a pro forma basis would have been approximately $6.3 million higher than the $25.9 million gross margin reported by the Company for the period, primarily due to the recognition by the combined entity of the gross profit associated with shipments of Kona-branded products and the gross profit generated by KBCs restaurant and pub operations, partially offset by increased excise taxes associated with the loss of the lower rate benefit to Kona as a separate company.
Since June 2008, the Company has maintained a loan agreement (the Loan Agreement) with Bank of America, N.A. (BofA), which was initially comprised of a $15.0 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 $13.5 million term loan (Term Loan). The Loan Agreement was most recently amended effective September 30, 2010 (the Third Amendment), primarily to accommodate the KBC Merger. The Loan Agreement, as amended, subjects the Company to a financial covenant based on earnings before interest, taxes, depreciation and amortization (EBITDA). See Liquidity and Capital Resources. EBITDA is defined per the Loan Agreement and requires additional adjustments, among other items, to (a) exclude merger-related expenses, (b) adjust losses (gains) on sale or disposal of assets, (c) exclude certain other non-cash income and expense items and (d) adjust for certain items that are specifically identified in either the Loan Agreement or the Third Amendment. The financial covenants under the Loan Agreement are measured on a trailing four-quarter basis. EBITDA as defined was $12.6 million for the trailing four quarters ended September 30, 2010.
Alternating proprietorship fees increased $1.1 million to $3.8 million for the third quarter of 2010. These fees are earned from Kona for leasing the Oregon Brewery and sales of raw materials during the corresponding periods, and reflect both the increased demand for Kona-branded products in the third quarter of 2010 as compared with the corresponding quarter a year ago and utilization of the Oregon Brewery to source some of the Kona-branded products for the Companys eastern markets.
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