Boston Beer Company, Inc. — Q1 2012 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2012; comparison is with the thirteen weeks ended March 26, 2011. The company sells alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and other brands. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2012 | Prior period | Change |
|---|---|---|---|
| Revenue before excise taxes | $122.9 | $111.4 | Up 10.3% |
| Net revenue | $113.3 | $102.2 | Up 10.9% |
| Gross profit | $61.8 | $52.4 | Up 18.0% |
| Gross margin | 54.6% | 51.3% | Up 3.3 percentage points |
| Operating income | $11.8 | $6.6 | Up 79.7% |
| Net income | $7.5 | $4.0 | Up 89.3% |
| Diluted earnings per share | $0.56 | $0.28 | Doubled |
| Operating cash flow | $1.8 | $(2.3) | Improved |
- Shipments rose 7.4% to 539,000 barrels; core-brand shipments rose 7.6%. Core-brand depletions increased about 10%. Net selling price per core-brand barrel rose 3.1% to $210.90.
- Core-brand gross profit per barrel increased to $115.25 from $105.07. Lower cost of goods sold per barrel and higher selling prices supported margin expansion; ingredient costs, including barley, remained a pressure.
- Advertising, promotional and selling expense increased 8.2% to $38.5 million, mainly due to sales staffing, point-of-sale investment, freight volume and fuel costs. General and administrative expense increased 11.7% to $11.5 million, partly due to Alchemy & Science startup costs.
Financial position and liquidity
- Cash and cash equivalents were $38.2 million at March 31, 2012, down from $49.5 million at year-end 2011. Operating cash flow was $1.8 million; investing used $15.0 million, including $13.5 million of property and equipment purchases and $1.5 million for the Angel City acquisition. Financing provided $2.0 million.
- Total assets were $277.5 million and total liabilities were $82.0 million. The company had no borrowings under its $50 million revolving credit facility, which was fully available and expires March 31, 2015. It reported compliance with its covenants.
- During the quarter, the company repurchased 38,850 Class A shares for approximately $3.7 million. At March 31, approximately $19.4 million remained under the $275 million repurchase limit.
- Management said cash, expected operating cash flow and the unused credit line should be sufficient for future cash requirements. Capital expenditures for 2012 were estimated at $40 million to $60 million, significantly above 2011 spending.
Outlook, risks and notable items
- Management maintained 2012 diluted EPS guidance of $3.80 to $4.20 and depletion growth of 6% to 9%. It expected revenue per barrel to increase about 3%, gross margin of 53% to 55%, and an effective tax rate near 38%.
- The company planned an $8 million to $12 million full-year increase in advertising, promotional and selling investment, excluding freight increases. It estimated $3 million to $5 million of startup costs for Alchemy & Science new brands; the EPS outlook includes estimated Alchemy & Science expenses but no gross profit contribution from that business.
- Management cited a challenging competitive pricing environment and higher packaging and ingredient costs, particularly barley. Actual earnings, depletion growth, margins and capital spending could differ materially from estimates. The company expected owned breweries and contracted third-party capacity to meet 2012 needs.
- In January 2012, a subsidiary acquired substantially all Angel City Brewing assets for a preliminary $1.9 million purchase price. Purchase-price allocation was preliminary; the company also entered a brewery lease and related services agreement with minimum payments totaling approximately $2.1 million through 2017.
- Outstanding commitments included approximately $11.4 million for advertising, $31.9 million for hops and $5.8 million for barley. Additional barley and malt commitments of $5.5 million were entered into on April 3, 2012.
- The IRS examination of the company’s 2007–2009 tax filings was ongoing, as was a state tax audit. A previously awarded $1.3 million arbitration judgment related to a former brewery contract was not recorded because collection was uncertain. The company reported no other pending or threatened litigation expected to materially affect its financial condition or results.
- The company stated that there were no significant changes in interest-rate or foreign-currency exposures, no derivatives used for hedging or trading, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether shipment and depletion growth continues, particularly given declines in some Samuel Adams styles and lower wholesaler inventory under the Freshest Beer Program.
- Whether pricing and brewery efficiencies can offset barley, packaging, freight and other cost pressures while achieving the 53%–55% gross-margin outlook.
- Progress against 2012 EPS and depletion guidance, including Alchemy & Science startup spending and the absence of expected contribution from that business in the outlook.
- Cash generation and liquidity as planned capital expenditures rise; confirm actual spending, capacity needs and use of the credit facility.
- Final accounting for the Angel City acquisition, the outcome of tax examinations, and whether the uncertain arbitration award is ultimately collectible.
- Repurchase activity and remaining authorization, alongside the company’s investment and liquidity requirements.