Boston Beer Company, Inc. — Q3 2015 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 26, 2015; comparisons are to the corresponding periods ended September 27, 2014. Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context and results
The company brews and sells Samuel Adams, Twisted Tea, Angry Orchard and other brands in the U.S. and selected international markets. Management attributed growth primarily to higher shipments and net revenue per barrel. Samuel Adams shipments and depletions declined, partially offset by gains in other brands.
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net revenue | $293.1 | $269.7 | $744.8 | $685.2 |
| Gross profit | $157.0 | $143.0 | $392.9 | $356.6 |
| Operating income | $60.9 | $60.6 | $129.8 | $114.5 |
| Net income | $38.6 | $37.9 | $82.3 | $71.7 |
| Diluted earnings per share | $2.85 | $2.79 | $6.02 | $5.29 |
- Q3 total shipments rose 4.4% to 1.284 million barrels; core-brand depletions increased approximately 6%. For the 39-week period, shipments rose 5.7% to 3.297 million barrels and core-brand depletions increased approximately 6%.
- Core-brand net revenue per barrel increased 4.1% in Q3 to $229.04 and 2.9% year to date to $226.61. Core-brand gross margin was 53.6% in Q3 versus 53.0%, and 52.8% year to date versus 52.1%.
- Q3 advertising, promotional and selling expense rose 20.3% to $78.2 million; year-to-date expense increased 9.2% to $209.8 million. Management cited greater media and local marketing, personnel costs and freight. Q3 operating income was nearly flat despite higher revenue.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $134.6 million at September 26, 2015, up from $76.4 million at December 27, 2014. Current assets were $272.3 million and current liabilities $132.8 million.
- For the 39 weeks, operating cash flow was $142.5 million, compared with $102.6 million; capital spending was $55.6 million versus $128.3 million. Financing used $28.6 million, including $83.8 million of Class A share repurchases, partly offset by $41.0 million in option-exercise proceeds.
- Debt and capital lease obligations, less current portion, were $0.5 million. The company had no revolving credit borrowings and had the full $150 million facility available through March 31, 2019; it reported compliance with covenants.
- Management said cash, expected operating cash flow and the unused credit facility should meet future cash requirements. Cash flow benefited from a $17.2 million IRS tax refund received in Q1.
Changes, outlook and notable items
- 2015 diluted EPS guidance was lowered to $7.00–$7.40 from $7.10–$7.50. Expected full-year depletion and shipment growth was reduced to 3%–6% from 6%–9%. Management estimated 2015 price increases of 1%–2%, gross margins of 51%–53%, and an effective tax rate of approximately 37%.
- Preliminary 2016 assumptions: mid- to high-single-digit depletion and shipment growth, 1%–2% price increases, gross margins of 52%–54%, and an effective tax rate of approximately 37%. Planned advertising, promotional and selling expense increases were $15–$25 million, excluding freight.
- Estimated 2015 capital expenditures were reduced to $60–$80 million from $70–$100 million; 2016 spending was estimated at $70–$90 million. Management said current 2016 capacity needs could be met by company breweries and existing contract capacity.
- At September 26, the company had $140.4 million in non-cancelable purchase commitments. On October 1, it committed to minimum aggregate glass purchases of $21.7 million for 2016. The board increased the share-buyback expenditure limit to $525 million on October 15; as of October 27, $118.4 million remained.
- Q3 impairment expense was $0.2 million, versus $1.6 million in Q3 2014. The company reported no litigation expected to materially affect its financial condition or results, but disclosed ongoing audits by two states.
- Management cautioned that brand and advertising investments may not generate sales growth, and actual results may differ materially from projections. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether shipment and depletion growth, especially outside Samuel Adams, supports the revised 2015 outlook and preliminary 2016 assumptions.
- Whether elevated advertising and promotional spending converts into sustained volume and revenue growth, and how it affects operating profitability.
- Whether gross-margin improvement continues amid higher brewery operating costs, product mix changes and freight expense.
- Cash requirements for planned brewery investment, share repurchases and purchase commitments, including the 2016 glass minimum.
- Final 2015 results and subsequent detailed 2016 guidance; the filing presents 2016 figures as preliminary assumptions, not firm guidance.