Boston Beer Company, Inc. — FY2017 Form 10-K
Business context and reporting period. The company brews and sells beer, hard cider and hard sparkling water, principally in the United States, through brands including Samuel Adams, Twisted Tea, Angry Orchard and Truly. Fiscal 2017 ended December 30, 2017 and comprised 52 weeks; the comparable 2016 year had 53 weeks. Boston Beer sold approximately 3.8 million barrels in 2017.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net revenue, after excise taxes | $863.0 million | $906.4 million | -4.8% |
| Barrels sold | 3.768 million | 4.019 million | -6.2% |
| Gross profit / margin | $449.9 million / 52.1% | $459.7 million / 50.7% | Margin +1.4 points |
| Operating income / margin | $115.7 million / 13.4% | $137.7 million / 15.2% | Income -16.0% |
| Net income | $99.0 million | $87.3 million | +13.4% |
| Diluted EPS | $8.09 | $6.79 | +19.1% |
| Cash from operations | $136.0 million | $154.2 million | -$18.2 million |
Net revenue per barrel rose 1.6% to $229.05, supported by price increases and product/package mix. Cost of goods sold per barrel fell to $109.64 from $111.17, helping lift gross margin. Advertising, promotional and selling expense increased 5.9% to $258.6 million, while operating income declined as lower volume and higher selling investment outweighed gross-margin improvement.
Net income benefited from a 14.7% effective tax rate, versus 36.3% in 2016. The company recorded a $20.3 million one-time tax benefit from the Tax Cuts and Jobs Act and a $4.4 million benefit from adoption of stock-compensation accounting guidance; consequently, earnings growth does not reflect operating income growth.
Cash and cash equivalents were $65.6 million at year-end, down from $91.0 million. Operating cash flow was $136.0 million; investing activities used $32.9 million, mainly for capital spending, and financing activities used $128.5 million, principally reflecting share repurchases. Working capital was $66.6 million, down from $99.7 million. The company had no borrowings under its $150 million revolving credit facility and reported $423.5 million of stockholders’ equity. It repurchased approximately 964,000 shares for $144.6 million in 2017.
Material changes and operating developments
- Distributor depletions fell approximately 7%; shipments declined 6.2%. Lower Samuel Adams and Angry Orchard volumes were partly offset by growth in Twisted Tea and Truly.
- The Better Beer and craft categories each grew an estimated 5% in 2017, while total beer volume was essentially flat. The company estimated hard cider volume fell 6% and flavored malt beverage volume fell 4%.
- Gross margin improved from 50.7% to 52.1%, driven by brewery cost savings, pricing and mix, partly offset by lower-volume fixed-cost absorption and higher ingredient and packaging costs.
- The company recorded $2.5 million of asset impairment charges, primarily for brewery equipment. It brewed and packaged over 90% of volume at company-owned breweries.
- Fourth-quarter 2017 net revenue was $206.3 million and net income was $30.5 million; fourth-quarter net income included the $20.3 million tax benefit. The comparable 2016 quarter comprised 14 weeks, versus 13 weeks in 2017.
Outlook, risks and contingencies
For 2018, management forecast depletions and shipments from flat to up 6%, national price increases of 0%–2%, and gross margin of 52%–54%. It targeted non-GAAP diluted EPS of $6.30–$7.30, excluding ASU 2016-09, and an approximately 28% non-GAAP effective tax rate on the same basis. These are targets, not guarantees. Management planned to increase advertising, promotional and selling expense by $15–$25 million and G&A expense by $10–$20 million, and estimated capital expenditures of $55–$65 million. It expected current brewery and contracted capacity to cover 2018 needs.
Key risks include intense competition and continued declines in company sales; dependence on independent distributors and their selling effort; reliance on company-owned breweries and limited third-party brewing capacity; supply, price and foreign-exchange exposure for agricultural ingredients and packaging; and the possibility that increased marketing investment will not restore growth. The company does not hedge its foreign-currency exposure and estimated that a hypothetical 10% adverse currency move could negatively affect future cash flows by approximately $3.7 million. It disclosed $216.4 million in contractual obligations, including brand support and ingredient commitments. No pending or threatened litigation was identified as expected to have a material adverse effect. Federal excise-tax reductions were scheduled to apply beginning in 2018 and currently expire at the end of 2019.
Management announced David Burwick would become CEO in the second quarter of 2018, succeeding Martin Roper. The filing describes substantial CEO compensation, including a planned $14.75 million restricted-stock award and a $1.0 million performance-based option award. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether depletion and shipment trends stabilize or meet the 2018 forecast, and whether growth remains concentrated in Twisted Tea and Truly.
- How much 2017 EPS growth came from the one-time tax benefit and stock-compensation tax accounting, versus recurring operating performance.
- Whether higher 2018 marketing and organizational spending delivers volume growth while maintaining the targeted gross margin.
- Whether brewery capacity, ingredient and packaging commitments, and the $150 million credit facility remain adequate under changing demand.
- The effect of continued share repurchases on cash, liquidity and per-share results, and the cost and execution of the CEO transition.