The Boston Beer Company, Inc. — Q1 2019 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2019; comparisons are with the thirteen weeks ended March 31, 2018. The company produces and sells alcoholic beverages, including Samuel Adams, Truly Hard Seltzer, Twisted Tea and Angry Orchard. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Prior period | Change / context |
|---|---|---|---|
| Revenue before excise taxes | $267.6M | $201.8M | Up 32.6% |
| Net revenue | $251.7M | $190.5M | Up 32.1%; net revenue per barrel down 0.3% to $233.77 |
| Barrels sold | 1.076M | 0.813M | Up 32.5% |
| Gross profit / margin | $124.5M / 49.5% | $96.1M / 50.5% | Gross profit up 29.6%; margin down 1.0 percentage point |
| Operating income / margin | $29.4M / 11.7% | $9.2M / 4.9% | Operating income up 218.7% |
| Net income | $23.7M | $9.3M | Up 154.5% |
| Diluted EPS | $2.02 | $0.78 | Up from prior period |
| Operating cash flow | $13.6M | $(10.4)M | Improved; working-capital investment remained significant |
| Capital expenditures | $22.1M | $11.5M | Primarily brewery investments |
| Cash and cash equivalents | $102.9M | $108.4M at Dec. 29, 2018 | Quarter-end balance |
- Advertising, promotional and selling expense was $71.7M, up 6.2%; it declined to 28.5% of net revenue from 35.5%. General and administrative expense rose 20.9% to $23.4M.
- Cost of goods sold per barrel increased to $118.08 from $116.12, reflecting higher third-party processing, temporary labor and packaging costs, partly offset by brewery cost savings.
- Total assets were $704.0M and total liabilities $214.2M at quarter-end. Lease liabilities were $30.9M following adoption of the new lease standard. No borrowings were outstanding under the $150M revolving credit facility, which expires March 31, 2023.
Material changes and operating trends
- Shipment growth was led by Truly Hard Seltzer and Twisted Tea, partly offset by declines in Samuel Adams and Angry Orchard. Depletions—distributor sales to retailers—rose approximately 11%, substantially slower than shipments.
- Distributor inventory averaged approximately six weeks on hand at quarter-end, versus the company’s expected normal range of three to four weeks. Management considered inventory appropriate to support expected summer growth and anticipated a return toward normal levels later in the year.
- Gross margin declined despite sharply higher revenue because costs per barrel increased and net revenue per barrel edged lower. Freight to distributors is included in selling expense, which may limit gross-margin comparability with companies that classify distribution costs differently.
- Operating cash flow turned positive from a prior-period outflow, but receivables and inventories absorbed cash. Cash declined $5.5M during the quarter, chiefly reflecting capital investment.
Outlook, risks and contingencies
- Management raised its 2019 estimates for depletions and shipments growth to 10%–15%, from 8%–13%. Estimated year-to-date depletions through April 13 were up approximately 12.5%.
- Management targeted national price increases of 1%–3%; expected 2019 gross margin was revised down to 50%–52% from 51%–53%.
- The company expected 2019 advertising, promotional and selling expense to increase $20M–$30M, excluding changes in freight. Non-GAAP diluted EPS guidance was $8.00–$9.00 and the estimated non-GAAP effective tax rate was approximately 27%; these measures exclude the potentially significant, unpredictable effects of ASU 2016-09.
- Estimated 2019 capital expenditures were $100M–$120M, mainly for breweries and taprooms. Management believed owned breweries and existing third-party capacity could cover 2019 needs.
- Outstanding non-cancelable contract obligations totaled $184.9M, including $54.6M for hops, barley and wheat, $50.5M for advertising, and $40.4M for equipment and machinery. The company also disclosed $2.8M of lease liabilities for leases not yet commenced.
- The company reported no pending or threatened litigation expected to have a material adverse effect and no material change in contractual obligations outside the ordinary course. One state tax audit was ongoing; the IRS had completed its 2015 examination with no change.
- Management cited risks to projections, including uncertain returns from increased brand investment, distributor inventory normalization, production costs and capacity, and other risks described in the company’s Form 10-K. No significant change in interest-rate or foreign-currency exposure was reported; the company did not use derivatives to hedge these risks.
Important facts for investors to verify
- Whether shipment growth converts into sustained consumer demand and distributor depletions, and whether elevated distributor inventory normalizes as expected.
- Whether Truly and Twisted Tea growth offsets continued weakness in Samuel Adams and Angry Orchard.
- Whether gross margins recover or remain pressured by production, packaging and freight-related costs.
- Progress and cash requirements for the $100M–$120M capital expenditure plan, alongside operating cash flow and the company’s available credit facility.
- Actual results versus the revised 2019 growth, margin, spending and non-GAAP EPS outlook; the filing cautions that actual results may differ materially.
- The impact of customer discounts and incentives on reported net revenue, and the significant contractual purchase and advertising commitments.