The Boston Beer Company, Inc. — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2015; comparisons are with the thirteen weeks ended March 29, 2014. Boston Beer brews and sells Samuel Adams, Twisted Tea, Angry Orchard, and other brands in the U.S. and selected international markets. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue, before excise taxes | $212.8 million | $197.4 million |
| Net revenue | $199.5 million | $183.8 million |
| Gross profit | $99.6 million | $90.5 million |
| Operating income | $22.1 million | $13.4 million |
| Net income | $13.7 million | $8.3 million |
| Diluted EPS | $1.00 | $0.62 |
| Cash from operating activities | $21.2 million | $(8.8) million |
| Capital expenditures | $18.7 million | $44.2 million |
- Net revenue increased 8.5%; shipments rose 6.1% to 889,000 barrels. Core-brand depletions increased approximately 8%.
- Gross margin was approximately 49.9% of net revenue, versus 49.2% in the prior-year quarter. Core-products gross margin was 50%, versus 49%; core-brand net revenue per barrel rose 2.3% to $225.14.
- Advertising, promotional and selling expense declined 1.7% to $60.2 million; general and administrative expense rose 8.6% to $17.2 million. The effective tax rate was approximately 37% in both periods.
- Cash and cash equivalents were $122.2 million at quarter-end, up from $76.4 million at December 27, 2014. Current assets were $250.4 million and current liabilities $102.1 million. Total debt and capital lease obligations were approximately $0.5 million.
- The company had no borrowings under its $150 million revolving credit facility, which expires March 31, 2019; it reported covenant compliance and full availability.
Changes and drivers versus the prior period
- Revenue growth primarily reflected higher shipments. Core-brand gains in Angry Orchard, Twisted Tea and Traveler were partly offset by slight declines in Samuel Adams shipments.
- Operating income increased to $22.1 million from $13.4 million, reflecting higher gross profit and lower advertising and promotional expense, partly offset by higher general and administrative costs.
- Operating cash flow improved from an $8.8 million use to $21.2 million provided. A $17.2 million IRS refund related to 2014 estimated taxes contributed to current-period cash flow; working-capital movements also affected the comparison.
- Investing cash use fell to $18.7 million from $44.1 million, primarily reflecting lower purchases of brewery equipment and kegs. Financing provided $43.3 million, including $39.7 million of stock-option exercise proceeds; the company used $9.5 million to repurchase Class A shares.
Outlook, risks and other notable items
- Management maintained 2015 diluted EPS guidance of $7.10–$7.50 and expected full-year shipments and depletions growth of 8%–12%. Through the 16 weeks ended April 18, depletions were estimated up approximately 8% year over year.
- Management targeted national price increases of 1%–2%, gross margins of 51%–53%, and an effective tax rate of approximately 38% for 2015.
- Planned 2015 advertising, promotional and selling expense increases were $25–$35 million, excluding increased freight costs. Estimated investment in Traveler and other existing Alchemy & Science brands was $10–$15 million of that total. Management cautioned that higher brand spending may not produce volume growth.
- Estimated 2015 capital expenditures were $80–$110 million, mainly for brewery investment and kegs; spending could exceed the estimate depending on growth needs. The company believed owned breweries and existing contract capacity could cover 2015 requirements.
- Non-cancelable purchase commitments totaled $154.6 million at March 28, 2015, including ingredients, advertising, equipment and bottles. Management reported no pending or threatened litigation expected to have a material adverse effect, and no material off-balance-sheet arrangements.
- The company received a $17.2 million IRS refund following tax-law changes allowing accelerated depreciation and a research and development credit on its 2014 federal return. Two state income tax audits were ongoing. Management said market-risk exposures had not changed significantly and it did not use derivatives for hedging or trading.
Important facts for investors to verify
- Whether shipment and depletion growth, pricing and brand mix support the 2015 EPS and gross-margin targets.
- How much first-quarter operating cash flow depended on the one-time $17.2 million tax refund and working-capital changes.
- Whether planned advertising and capital spending deliver expected growth, and whether capital expenditures remain within the stated range.
- The scale and timing of the $154.6 million purchase commitments and the company’s ongoing capacity and supplier requirements.
- Share repurchase activity and remaining authorization: as of April 24, 2015, approximately $28.3 million remained under the $350 million expenditure limit.