Dutch Bros(BROS) - 2024 Q3 - Quarterly Report

Glossary This section defines key terms and abbreviations used throughout the financial report Forward-Looking Statements This section provides cautionary statements regarding future expectations and risks associated with forward-looking information Website Disclosure This section informs readers about the availability of company information on its official website PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. FINANCIAL STATEMENTS (Unaudited) This section presents Dutch Bros Inc.'s unaudited condensed consolidated financial statements and related notes for Q3 2024 and 2023 Condensed Consolidated Balance Sheets Total assets and liabilities significantly increased from December 2023 to September 2024, driven by cash, property, and debt Balance Sheet Summary | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | |:---|:---|:---| | Total assets | $2,431,516 | $1,764,010 | | Total liabilities | $1,678,845 | $1,088,089 | | Total equity | $752,671 | $675,921 | | Cash and cash equivalents | $281,134 | $133,545 | | Property and equipment, net | $662,759 | $542,440 | | Deferred income tax assets, net | $718,543 | $402,995 | | Long-term debt, net of current portion | $224,361 | $93,175 | | Tax receivable agreements liability | $605,003 | $290,920 | Condensed Consolidated Statements of Operations Revenue, net income, and diluted EPS significantly increased for Q3 and YTD September 2024, driven by company-operated shops Statements of Operations Summary | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|:---|:---| | Total revenues | $338,212 | $264,507 | $938,229 | $711,653 | | Income from operations | $32,515 | $24,694 | $90,315 | $44,043 | | Net income | $21,712 | $13,401 | $60,083 | $13,721 | | Net income attributable to Dutch Bros Inc. | $12,644 | $4,210 | $31,646 | $3,120 | | Diluted EPS | $0.11 | $0.07 | $0.32 | $0.05 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income significantly increased for Q3 and YTD September 2024 despite unrealized derivative losses Statements of Comprehensive Income Summary | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|:---|:---| | Net income | $21,712 | $13,401 | $60,083 | $13,721 | | Unrealized gain (loss) on derivative securities | $(1,324) | $385 | $(537) | $659 | | Comprehensive income attributable to Dutch Bros Inc. | $11,882 | $4,398 | $31,412 | $3,400 | Condensed Consolidated Statements of Stockholders' Equity Total equity increased to $752.7 million by September 2024, driven by net income and additional paid-in capital Statements of Stockholders' Equity Summary | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | |:---|:---|:---|\n| Total stockholders' equity attributable to Dutch Bros Inc. | $523,150 | $364,345 | | Non-controlling interests | $229,521 | $311,576 | | Total equity | $752,671 | $675,921 | | Additional paid-in capital (Nine Months Ended Sep 30, 2024) | $506,785 | $379,391 | | Retained earnings (accumulated deficit) (Nine Months Ended Sep 30, 2024) | $16,054 | $(15,592) | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased, investing activities remained high, and financing cash decreased for YTD September 2024 Statements of Cash Flows Summary | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|\n| Net cash provided by operating activities | $184,195 | $94,906 | | Net cash used in investing activities | $(169,363) | $(167,461) | | Net cash provided by financing activities | $132,757 | $202,163 | | Net increase in cash and cash equivalents | $147,589 | $129,608 | | Cash and cash equivalents, end of period | $281,134 | $149,786 | Notes to Condensed Consolidated Financial Statements Detailed notes explain accounting policies, revenue, restructuring, assets, debt, equity, and segment performance NOTE 1 — Organization and Background Dutch Bros operates 950 shops in 18 states, with Dutch Bros Inc. holding 64.2% economic interest in OpCo - As of September 30, 2024, Dutch Bros had 950 shops in operation across 18 U.S. states, comprising 645 company-operated and 305 franchised locations[26] - Dutch Bros Inc. holds 100.0% of the voting interest and 64.2% of the economic interest in Dutch Bros OpCo as of September 30, 2024[28] NOTE 2 — Basis of Presentation and Summary of Significant Accounting Policies Financial statements follow GAAP and SEC rules; no material accounting policy updates, new ASUs are being assessed - The Company is currently assessing the potential impacts of ASU No. 2023-09 (Income Taxes) on its income tax disclosures, effective for annual periods beginning after December 15, 2024[33] - The Company has completed its analysis of ASU No. 2023-07 (Segment Reporting) and expects to provide additional detail and disclosures commencing with the 2024 Form 10-K, primarily related to cost of sales for company-operated shops[34] NOTE 3 — Revenue Recognition Total revenues reached $938.2 million for YTD September 2024, mainly from company shops, with deferred revenue increasing Revenue Components | Revenue Component | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|\n| Company-operated shops | $851,648 | $630,588 | | Franchising | $82,545 | $76,860 | | Other | $4,036 | $4,205 | | Total revenues | $938,229 | $711,653 | Deferred Revenue (Gift Card & Loyalty) | Deferred Revenue (Gift Card & Loyalty) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|\n| Beginning balance | $34,616 | $26,904 | | Revenue deferred | $312,963 | $255,782 | | Revenue recognized | $(308,012) | $(257,144) | | Ending balance | $39,567 | $25,542 | | Current portion | $(35,316) | $(21,999) | | Net of current portion | $4,251 | $3,543 | Future Recognition of Unearned Franchise Fees | Future Recognition of Unearned Franchise Fees | Amount (in thousands) | |:---|:---|\n| Remainder of 2024 | $111 | | 2025 | $409 | | 2026 | $367 | | 2027 | $322 | | 2028 | $273 | | Thereafter | $1,056 | | Total | $2,538 | NOTE 4 — Organization Realignment and Restructuring Organizational realignment in January 2024 involves staff relocation, with $13.5 million of $18-22 million estimated charges incurred - The Company's Board of Directors approved an organizational realignment and restructuring plan on January 29, 2024, to expand its Phoenix, Arizona office, aiming to relocate approximately 40% of total support operations staff by January 1, 2025[40] - Total estimated charges for this initiative are approximately $18 million to $22 million, consisting of $14 million to $18 million in employee-related costs and $4 million in other costs[40] Restructuring Charges | Restructuring Charges (in thousands) | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2024 | |:---|:---|:---|\n| Relocation and travel costs | $2,217 | $9,710 | | One-time termination benefits | $1,781 | $3,577 | | Total employee-related costs | $3,998 | $13,287 | | Duplicate rent | $193 | $223 | | Total other costs | $193 | $223 | | Total restructuring costs incurred | $4,191 | $13,510 | NOTE 5 — Inventories Net inventories decreased to $38.4 million by September 2024, primarily due to a reduction in raw materials Inventory Components | Inventory Component (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Raw materials | $19,965 | $28,523 | | Finished goods | $18,416 | $18,430 | | Total inventories | $38,381 | $46,953 | NOTE 6 — Property and Equipment Net property and equipment increased to $662.8 million by September 2024, driven by investments, with $46.4 million depreciation YTD Property and Equipment Details | Property and Equipment (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Software | $10,252 | $7,212 | | Equipment and fixtures | $199,155 | $157,352 | | Leasehold improvements | $51,308 | $42,441 | | Buildings | $386,500 | $269,186 | | Land | $7,781 | $7,338 | | Construction-in-progress | $167,962 | $166,054 | | Property and equipment, gross | $822,958 | $658,778 | | Less: accumulated depreciation | $(160,199) | $(116,338) | | Property and equipment, net | $662,759 | $542,440 | Depreciation Expense | Depreciation Expense (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Cost of sales | $16,556 | $11,157 | $45,579 | $30,403 | | Selling, general and administrative expenses | $373 | $408 | $841 | $1,235 | | Total depreciation expense | $16,929 | $11,565 | $46,420 | $31,638 | NOTE 7 — Intangible Assets Net intangible assets decreased to $3.5 million by September 2024, primarily due to amortization of reacquired franchise rights Intangible Assets Details | Intangible Assets (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Reacquired franchise rights | $27,049 | $27,049 | | Less: accumulated amortization | $(23,594) | $(21,634) | | Intangibles, net | $3,455 | $5,415 | Amortization Expense | Amortization Expense (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Cost of sales | $508 | $820 | $1,960 | $2,589 | NOTE 8 — Leases Right-of-use assets and lease liabilities increased to $679.5 million and $688.5 million respectively, with $62.0 million in total lease costs YTD Lease Metrics | Lease Metric (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Total right-of-use assets | $679,457 | $582,407 | | Total lease liabilities | $688,512 | $578,915 | | Finance lease right-of-use assets, net | $377,561 | $382,734 | | Operating lease right-of-use assets, net | $301,896 | $199,673 | | Finance lease liabilities, net of current portion | $369,206 | $367,775 | | Operating lease liabilities, net of current portion | $293,474 | $191,419 | Lease Costs | Lease Costs (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|\n| Total finance lease costs | $35,603 | $27,528 | | Total operating lease costs | $21,527 | $14,097 | | Variable lease costs | $4,871 | $3,434 | | Total lease costs | $62,001 | $45,059 | Noncash Investing and Financing Activities | Noncash Investing and Financing Activities (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|\n| Right-of-use assets obtained in exchange for lease obligations: Finance leases | $12,520 | $122,990 | | Right-of-use assets obtained in exchange for lease obligations: Operating leases | $112,579 | $28,626 | NOTE 9 — Debt Credit facility increased to $650 million, with $150 million drawn, resulting in $237.8 million outstanding term loans and $224.4 million net long-term debt - On August 4, 2023, the Company amended its 2022 Credit Facility to increase borrowing capacity by $150 million to a total of $650 million[52] - On February 20, 2024, the Company drew $150 million on its delayed draw term loan facility[53] Long-Term Debt | Long-Term Debt (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Term loans under credit facility | $237,813 | $95,625 | | Total debt | $241,164 | $99,062 | | Less: current portion | $(15,746) | $(4,491) | | Total long-term debt, net of current portion | $224,361 | $93,175 | NOTE 10 — Derivative Financial Instruments An interest rate swap with a $64.8 million notional amount hedges interest rate risk, with its fair value decreasing to $1.2 million - As of September 30, 2024, the interest rate swap had a notional amount of approximately $64.8 million and hedges interest rate risk on the term loan under the 2022 Credit Facility[60] - The interest rate swap matures on February 28, 2027, and has a fixed rate of 2.67% per annum for the Pay Leg[60] Derivative Instrument Fair Value | Derivative Instrument (in thousands) | September 30, 2024 | December 31, 2023 | |:---|:---|:---|\n| Total derivative instrument designated as cash flow hedge | $1,160 | $2,208 | NOTE 11 — Income Taxes Income tax expense increased to $17.3 million for YTD September 2024, with the effective tax rate decreasing to 22.4% Income Tax Metrics | Income Tax Metric (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Income tax expense | $4,698 | $1,828 | $17,330 | $6,259 | | Effective tax rate | 17.8% | 12.0% | 22.4% | 31.3% | NOTE 12 — Equity-Based Compensation All RSAs vested, RSUs increased to 1.2 million, and YTD equity compensation was $8.2 million with $25.6 million unrecognized Restricted Stock Awards | Restricted Stock Awards (in thousands) | December 31, 2023 | September 30, 2024 | |:---|:---|:---|\n| Balance | 1,283 | — | | Weighted-average grant date fair value per share | $23.00 | $— | Restricted Stock Units | Restricted Stock Units (in thousands) | December 31, 2023 | September 30, 2024 | |:---|:---|:---|\n| Balance | 648 | 1,203 | | New grants | 795 | N/A | | Vested | (102) | N/A | | Forfeitures | (138) | N/A | | Weighted-average grant date fair value per share | $35.99 | $32.40 | Equity-Based Compensation Expense | Equity-Based Compensation Expense (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|\n| Total stock-based compensation expense | $8,220 | $29,017 | | Unrecognized stock-based compensation (as of Sep 30, 2024) | $25,624 | N/A | NOTE 13 — Non-Controlling Interests Dutch Bros Inc. holds 64.2% economic interest in Dutch Bros OpCo, with non-controlling interests holding 35.8% Ownership Interest in Dutch Bros OpCo | Ownership Interest in Dutch Bros OpCo (in thousands) | OpCo Units | Ownership % | |:---|:---|:---|\n| Dutch Bros OpCo Class A common units held by Dutch Bros Inc. | 113,823 | 64.2% | | Dutch Bros OpCo Class A common units held by non-controlling interest holders | 63,369 | 35.8% | | Total Dutch Bros OpCo Class A common units outstanding | 177,192 | 100.0% | Distributions to Non-Controlling Interest Holders | Distributions to Non-Controlling Interest Holders (in thousands) | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2024 | |:---|:---|:---|\n| Amounts paid to non-controlling interest holders | $687 | $687 | NOTE 14 — Income Per Share Basic and diluted EPS significantly increased for Q3 and YTD September 2024 due to higher net income and more shares outstanding Income Per Share Metrics | Income Per Share Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Net income attributable to Dutch Bros Inc. | $12,644 | $4,210 | $31,646 | $3,120 | | Basic net income per share | $0.11 | $0.07 | $0.32 | $0.05 | | Diluted net income per share | $0.11 | $0.07 | $0.32 | $0.05 | | Weighted-average shares outstanding - basic | 113,819 | 59,366 | 99,756 | 57,598 | | Weighted-average shares outstanding - diluted | 114,252 | 60,214 | 100,070 | 57,598 | NOTE 15 — Commitments and Contingencies Franchise lease guarantees total $1.3 million, a derivative lawsuit was dismissed, and TRA liabilities increased to $605.0 million - As of September 30, 2024, Dutch Bros Inc. guaranteed approximately $1.3 million in franchise partners' lease payments[81] - A stockholder derivative lawsuit (Briggs Complaint) was dismissed on August 20, 2024, following the dismissal of a related class action lawsuit (Rein) in June 2024[86][87] - As of September 30, 2024, Dutch Bros Inc. recognized $605.0 million of liabilities related to its obligations under the Tax Receivable Agreements (TRAs)[88] NOTE 16 — Related Party Transactions Aircraft sale yielded $1.3 million gain, and donations to Dutch Bros Foundation increased to $1.7 million YTD September 2024 Aircraft Sale | Aircraft Sale (in thousands) | Nine Months Ended Sep 30, 2024 | |:---|:---|\n| Sales price of Aircraft | $9,545 | | Net book value of Aircraft | $8,243 | | Gain on disposal of Aircraft | $1,302 | Donations to Dutch Bros Foundation | Donations to Dutch Bros Foundation (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Donations | $63 | $63 | $1,688 | $189 | NOTE 17 — Segment Reporting Both Company-operated and Franchising segments showed significant revenue and contribution growth for Q3 and YTD September 2024 - The Company's CEO evaluates financial performance based on two operating segments: Company-operated shops and Franchising and other[91] Segment Revenues | Segment Revenues (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Company-operated shops | $308,295 | $236,472 | $851,648 | $630,588 | | Franchising and other | $29,917 | $28,035 | $86,581 | $81,065 | | Total revenues | $338,212 | $264,507 | $938,229 | $711,653 | Segment Contribution | Segment Contribution (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Company-operated shops | $90,847 | $73,324 | $255,900 | $182,075 | | Franchising and other | $22,696 | $19,563 | $62,877 | $58,257 | | Total segment contribution | $113,543 | $92,887 | $318,777 | $240,332 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial performance, revenue growth from new shops and sales, macroeconomic impacts, segment performance, and non-GAAP measures Overview Dutch Bros is a high-growth drive-thru coffee operator with 950 shops, reporting $338.2 million revenue and $21.7 million net income for Q3 2024 - Dutch Bros is a high-growth operator and franchisor of drive-thru shops, considered one of the fastest-growing brands in the U.S. quick service beverage industry by location count[97] - As of September 30, 2024, the company had 950 company-operated and franchised shops in 18 states, representing an approximate 19.6% increase from the prior year[98] Key Financial Metrics (Three Months Ended Sep 30, 2024) | Metric | Three Months Ended Sep 30, 2024 (in millions) | |:---|:---|\n| Revenue | $338.2 | | Net income | $21.7 | | Diluted EPS | $0.11 | Impact of Global Events Macroeconomic conditions, including inflation and minimum wage increases, impact operations, with mitigation efforts including pricing and productivity adjustments - Dutch Bros' results are sensitive to macroeconomic conditions, including inflation, which may adversely affect business, financial condition, or results of operations[99] - The company expects continued pressure from legislated minimum wage increases, such as California's $20 per hour minimum wage effective April 2024 for covered employees[101] - Measures taken to offset wage pressures include gradual menu price increases, adjustments to the Dutch Rewards loyalty program, and operating adjustments to increase productivity[101] Results of Operations Total revenues, income from operations, and net income significantly grew for Q3 and YTD September 2024, driven by company-operated shops Results of Operations Summary | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | |:---|:---|:---|:---|:---|\n| Total revenues | $338,212 | $264,507 | $938,229 | $711,653 | | Income from operations | $32,515 | $24,694 | $90,315 | $44,043 | | Net income | $21,712 | $13,401 | $60,083 | $13,721 | | Net income attributable to Dutch Bros Inc. | $12,644 | $4,210 | $31,646 | $3,120 | Key Performance Indicators Total shops reached 950, with 103 new company-operated shops; systemwide same shop sales grew 5.2% and AUV was $2,004 thousand YTD September 2024 Key Performance Indicators Summary | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Total shop count (end of period) | 950 | 794 | 950 | 794 | | Company-operated new openings | 33 | 37 | 103 | 114 | | Franchised new openings | 5 | 2 | 16 | 8 | | Systemwide same shop sales | 2.7% | 4.0% | 5.2% | 2.1% | | Company-operated same shop sales | 4.0% | 2.8% | 6.3% | 0.5% | | Systemwide sales (in thousands) | $478,765 | $391,286 | $1,342,750 | $1,069,284 | | Systemwide AUV (in thousands) | N/A | N/A | $2,004 | $1,950 | Company-operated Shop Results Company-operated shop revenues grew 35.1% to $851.6 million YTD September 2024, with gross profit margin improving to 22.6% Company-operated Shop Revenues | Company-operated Shop Revenues (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (in thousands) | Change % | |:---|:---|:---|:---|:---|\n| Company-operated shop revenues | $851,648 | $630,588 | $221,060 | 35.1% | - The increase in company-operated shop revenue for the nine months ended September 30, 2024, was primarily driven by $191.1 million from shops not yet in the comparable base and $29.9 million from increased same shop sales[111] Company-operated Shop Costs (as % of revenue) | Company-operated Shop Costs (as % of revenue) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (bps) | |:---|:---|:---|:---|\n| Beverage, food, and packaging costs | 25.5% | 26.8% | (130) | | Labor costs | 27.1% | 26.8% | 30 | | Occupancy and other costs | 16.0% | 15.8% | 20 | | Pre-opening costs | 1.4% | 1.7% | (30) | | Depreciation and amortization | 7.4% | 7.0% | 40 | | Company-operated shop gross profit | 22.6% | 21.9% | 70 | | Company-operated shop contribution | 30.0% | 28.9% | 110 | - Pre-opening costs per new company-operated shop increased by 19.1% to $112 for the nine months ended September 30, 2024, compared to $94 in the prior year, driven by opening a lower proportion of shops in existing markets[122][124] Franchising and Other Segment Performance Franchising and Other segment revenue grew 6.8% to $86.6 million, with gross profit margin improving to 68.7% YTD September 2024 Franchising and Other Segment Performance | Franchising and Other Segment (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (in thousands) | Change % | |:---|:---|:---|:---|:---|\n| Franchising and other revenue | $86,581 | $81,065 | $5,516 | 6.8% | | Franchising and other gross profit | $59,483 | $54,228 | $5,255 | 9.7% | | Gross profit as a percentage of revenue | 68.7% | 66.9% | N/A | 180 bps | - The increase in franchising and other gross profit for the nine months ended September 30, 2024, was driven by $3.5 million from shop weeks and $2.1 million from same shop sales[130] Selling, General, and Administrative SG&A expenses increased 9.3% to $161.9 million YTD September 2024, but decreased to 17.3% of revenues due to leverage and lower equity compensation Selling, General and Administrative Expenses | SG&A (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (in thousands) | Change % | |:---|:---|:---|:---|:---|\n| Selling, General and Administrative | $161,866 | $148,128 | $13,738 | 9.3% | | As a percentage of total revenues | 17.3% | 20.8% | N/A | (350) bps | - For the nine months ended September 30, 2024, SG&A increased due to $22.1 million in human capital/systems investments and $13.5 million in organization realignment costs, offset by $21.4 million lower equity-based compensation[134] Other Expense Total other expense significantly decreased for Q3 and YTD September 2024 due to higher interest income and remeasurement gains Other Expense Summary | Other Expense (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Interest expense, net | $(6,869) | $(9,325) | $(20,259) | $(26,269) | | Other income (expense), net | $764 | $(140) | $7,357 | $2,206 | | Total other expense | $(6,105) | $(9,465) | $(12,902) | $(24,063) | - The decrease in interest expense, net, for both periods was primarily driven by interest income on cash invested in money market funds, partially offset by additional finance leases for new shop builds[137][138] - The increase in other income (expense), net, for the nine months ended September 30, 2024, was primarily due to higher remeasurement gains related to the TRAs liability and the gain on sale of the Company airplane and hangar[138] Income Tax Expense Income tax expense increased 176.9% to $17.3 million YTD September 2024, with an effective tax rate of 22.4% Income Tax Metrics | Income Tax Metric (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (in thousands) | Change % | |:---|:---|:---|:---|:---|\n| Income tax expense | $17,330 | $6,259 | $11,071 | 176.9% | | Effective tax rate | 22.4% | 31.3% | N/A | N/M | - The increase in tax expense for the nine months ended September 30, 2024, was primarily driven by increased current year pre-tax income and changes in state earnings mix, impacting deferred taxes[140] Liquidity and Capital Resources Cash increased to $281.1 million by September 2024 from operations and debt, used for new shops and a roasting facility Cash Flow Summary | Cash Flow Summary (in thousands) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (in thousands) | |:---|:---|:---|:---|\n| Net cash provided by operating activities | $184,195 | $94,906 | $89,289 | | Net cash used in investing activities | $(169,363) | $(167,461) | $(1,902) | | Net cash provided by financing activities | $132,757 | $202,163 | $(69,406) | | Net increase in cash and cash equivalents | $147,589 | $129,608 | $17,981 | | Cash and cash equivalents at end of period | $281,134 | $149,786 | $131,348 | - Principal sources of liquidity for the nine months ended September 30, 2024, were cash flows from operations and the delayed draw term loan facility[141] - Operating lease liabilities increased by approximately $197 million and debt obligations increased by approximately $142 million on a net basis from the 2023 Form 10-K, primarily due to new leases and delayed draw term loan proceeds[147] Seasonality Business experiences seasonality, with higher sales and gross profit margins typically in Q2 and Q3 due to summer months - The business is subject to seasonal fluctuations, typically experiencing higher nominal system sales and company-operated shop gross profit margins in the second and third quarters of the fiscal year[153] Critical Accounting Estimates Financial statements rely on critical accounting estimates, with no material changes from 2023 Form 10-K disclosures - No material changes to critical accounting estimates have occurred from those disclosed in the 2023 Form 10-K[155] Non-GAAP Financial Measures Non-GAAP measures provide supplemental performance information, excluding non-recurring items for better comparability and transparency - Non-GAAP financial measures provide useful supplemental information about operating performance, enable comparison of financial trends, and offer transparency into key metrics used by management[156] - Adjusted EBITDA excludes equity-based compensation, expenses associated with equity offerings, executive transitions, (gain) loss on TRAs remeasurement, legal proceedings, sale of Aircraft, and organization realignment and restructuring costs[161] Non-GAAP Metrics | Non-GAAP Metric (in thousands) | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | |:---|:---|:---|:---|:---|\n| Company-operated shop contribution | $90,847 | $73,324 | $255,900 | $182,075 | | Adjusted EBITDA | $63,762 | $53,008 | $181,461 | $125,487 | | Adjusted selling, general and administrative | $50,268 | $40,154 | $138,321 | $115,311 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company faces commodity, labor, and interest rate risks, mitigated by pricing, loyalty program adjustments, and interest rate swaps - The company is exposed to commodity risks (coffee, dairy, energy), labor cost risks (minimum wage increases), and interest rate risks (floating-rate debt)[176][177][178] - Mitigation strategies include menu price increases, adjustments to the Dutch Rewards loyalty program, and operational adjustments to increase productivity[179] - A hypothetical 1% increase in interest rates on the outstanding term loan ($237.8 million as of September 30, 2024) would result in an approximate $2.4 million increase in annual interest expense[178] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls were effective as of September 30, 2024, with no material changes to internal control over financial reporting - As of September 30, 2024, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[180] - No material changes to internal control over financial reporting occurred during the three months ended September 30, 2024[181] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, equity security sales, and other required disclosures ITEM 1. LEGAL PROCEEDINGS The company is involved in routine legal actions with unpredictable outcomes; further details are in Note 15 - The company is a party to routine legal actions arising in the ordinary course of business, with outcomes being unpredictable[181] - Further information on legal proceedings is available in NOTE 15 — Commitments and Contingencies[182] ITEM 1A. RISK FACTORS Significant risks include consumer preferences, competition, growth management, supply chain, brand reputation, labor costs, and multi-class stock structure Summary of Risk Factors Key investment risks include evolving consumer preferences, intense competition, growth challenges, supply chain interruptions, and brand reputation - Evolving consumer preferences and tastes or changes in consumer spending may adversely affect the business[184] - The company may not be able to compete successfully with other shops, QSRs, and convenience shops, including coffee delivery options[185] - Interruption of the supply chain for coffee, flavored syrups, or other ingredients, equipment, or packaging could negatively impact business and profitability[185] Risk Factors Detailed risks cover operations, brand, human capital, regulations, and stock ownership, including inflation, growth, cybersecurity, and multi-class stock control - Increases in real estate or labor costs, changes in consumer preferences, supply chain disruptions, and inflation can cause significant fluctuations in operating results[191] - The company's growth strategy depends on opening new shops, but there's no guarantee of suitable sites, timely approvals, or profitable operations, especially in new markets[197][198][201] - Damage to the brand or reputation from negative publicity, food safety concerns, or employee misconduct could significantly reduce brand value and sales[207][208][271] - The multi-class common stock structure concentrates voting control with the Co-Founder, limiting other stockholders' influence on corporate matters[350][353][355] - The company is subject to stringent and changing data privacy and security laws, with potential for significant compliance costs, litigation, and reputational harm from security incidents[303][305][312] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS In July 2024, Dutch Bros Inc. purchased 1,350 Class A common shares at $41.85 each to satisfy RSU tax withholding obligations Shares Purchased | Period | Total Number of Shares Purchased | Weighted-Average Price Paid Per Share | |:---|:---|:---|\n| July 1 - 31, 2024 | 1,350 | $41.85 | - Shares of Class A common stock were delivered to Dutch Bros by employees to satisfy tax withholding obligations upon the vesting of RSUs[409] ITEM 3. DEFAULTS UPON SENIOR SECURITIES Dutch Bros Inc. reported no defaults upon senior securities for the period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Dutch Bros Inc ITEM 5. OTHER INFORMATION Dutch Bros Inc. reported no Rule 10b5-1 Trading Arrangements for the period ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, an advisor agreement, and CEO/CFO certifications - Exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Form of Common Stock Certificate, and an Advisor Agreement with Charles Jemley[411][412][413] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are included[414][415][416] SIGNATURES This section contains the required signatures for the financial report, certifying its accuracy and completeness