Business context and reporting period
The Boston Beer Company, Inc. is a high-end alcoholic beverage producer with brands including Samuel Adams, Twisted Tea, Truly Hard Seltzer, Angry Orchard and Dogfish Head. This Form 10-K covers the 52-week fiscal year ended December 28, 2019; the filing also provides fourth-quarter results. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue, before excise taxes | $1,329.1 million | $1,057.5 million |
| Net revenue | $1,249.8 million | $995.6 million |
| Barrels sold | 5.307 million | 4.286 million |
| Gross profit / gross margin | $614.2 million / 49.1% | $512.2 million / 51.4% |
| Operating income | $144.9 million | $115.9 million |
| Net income | $110.0 million | $92.7 million |
| Diluted earnings per share | $9.16 | $7.82 |
| Cash from operating activities | $178.2 million | $163.4 million |
| Capital expenditures | $93.2 million | $55.5 million |
- Net revenue rose 25.5%; shipments increased 23.8% and net revenue per barrel increased 1.4% to $235.51. Distributor depletions grew approximately 22%, including 19% growth from legacy brands and a 3-point contribution from Dogfish Head.
- Gross margin declined 2.3 percentage points. Cost of goods sold per barrel rose 6.2%, mainly from greater use of third-party brewing and temporary labor; operating expenses also increased, though advertising, promotional and selling expense fell as a share of net revenue.
- Cash and cash equivalents were $36.7 million at year-end, down from $108.4 million. Working capital was $38.0 million versus $111.1 million. The filing attributes the cash decline principally to the Dogfish Head acquisition and capital spending, along with higher working-capital investment.
- Total assets were $1,054.1 million and stockholders’ equity was $735.6 million. The company had no borrowings outstanding at year-end and had a $150 million revolving credit facility available through March 31, 2023. Lease liabilities were $59.1 million for operating leases and $2.6 million for finance leases.
- Fourth-quarter net revenue was $301.3 million versus $225.2 million in Q4 2018; operating income was $17.7 million versus $28.9 million, and net income was $13.8 million versus $21.8 million.
Material changes and unusual items
- The July 3, 2019 Dogfish Head acquisition had estimated fair-value consideration of $317.7 million, funded with approximately $173 million cash and restricted Class A shares valued at approximately $163 million before a liquidity-related fair-value reduction. Dogfish Head contributed $48.5 million of revenue after closing.
- The filing reports conflicting Dogfish Head net-income contributions for the post-acquisition period: $4.8 million in the business discussion and $1.6 million in Note C. This difference should be checked against the filed statements and subsequent disclosures.
- Acquisition accounting recorded $108.8 million of goodwill and $102.3 million of identified intangible assets, including a $98.5 million indefinite-lived brand name. The purchase-price allocation was preliminary. The auditor identified valuation of the Dogfish Head brand name as a critical audit matter.
- Approximately $10.0 million of estimated $12.0 million transaction-related and other non-recurring costs had been expensed by year-end. The filing also reports $0.9 million of asset impairment charges, primarily for brewery equipment.
- Operating cash flow exceeded capital expenditures, but acquisition spending drove investing cash outflow to $258.8 million. No shares were repurchased under the stock repurchase program in 2019; the remaining authorized repurchase limit was approximately $90.3 million.
Outlook, commentary and risks
- For 2020, management targeted shipment and depletion growth of 15%–25% (11%–21% excluding Dogfish Head), national price increases of 1%–3%, and gross margin of 49%–51%.
- Management targeted non-GAAP diluted EPS of $10.70–$11.70 and a non-GAAP effective tax rate of approximately 27%, excluding the potential impact of ASU 2016-09. These are non-GAAP targets, and the company said it could not provide a forward reconciliation without unreasonable effort.
- Management expected advertising, promotional and selling expenses to increase by $80–$90 million in 2020, and forecast capital expenditures of $135–$155 million, primarily for brewery capacity and efficiency. Management said current owned and contracted capacity was expected to cover 2020 needs.
- Key operating risks include intense competition, particularly in hard seltzer; dependence on independent distributors; capacity and supply-chain constraints; reliance on City Brewing for approximately 23% of 2019 shipment volume; packaging shortages, especially sleek cans; and agricultural input availability, pricing and unhedged foreign-currency exposure.
- Additional risks include acquisition integration and impairment risk, changes in consumer preferences and alcohol regulation, product quality or recall events, and the possibility that increased marketing and capital investment may not deliver forecast growth or returns. A 10% adverse foreign-exchange movement was estimated to reduce future cash flows by approximately $3.8 million.
- The company reported no pending or threatened litigation expected to have a material adverse effect. The financial-statement audit and internal-control audit received unqualified opinions; Dogfish Head was excluded from management’s 2019 internal-control assessment while integration continued.
Important facts for investors to verify
- Reconcile the conflicting $4.8 million and $1.6 million Dogfish Head net-income figures and confirm the final purchase-price allocation.
- Track whether 2020 volume, margin, EPS, pricing, marketing-spend and capital-expenditure targets were achieved; distinguish the company’s non-GAAP targets from GAAP results.
- Assess gross-margin recovery and whether capacity investment, contract brewing and packaging availability can support growth without further cost pressure or shortages.
- Monitor cash, working capital and liquidity after acquisition and capital spending, including use of the revolving credit facility and compliance with its covenants.
- Review the valuation assumptions and impairment sensitivity of Dogfish Head goodwill and the indefinite-lived brand intangible, as well as integration of Dogfish Head financial controls.