Boston Beer Company, Inc. — Q3 2018 Form 10-Q
Reporting period: Third quarter and first 39 weeks ended September 29, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars. Unless noted, financial statement figures are in millions.
Business context and results
The company produces and sells beer, cider and other alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling. In the quarter, volume growth was led by Truly, Twisted Tea and Angry Orchard; Samuel Adams shipments declined.
| Metric | 13 weeks 2018 | 13 weeks 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net revenue | $306.9 | $247.0 | $770.4 | $656.7 |
| Barrels sold | 1.338 million | 1.084 million | 3.328 million | 2.869 million |
| Gross profit | $157.2 | $131.5 | $395.3 | $341.9 |
| Gross margin | 51.2% | 53.2% | 51.3% | 52.1% |
| Operating income | $46.7 | $51.5 | $87.0 | $100.8 |
| Net income | $38.0 | $33.7 | $70.9 | $68.5 |
| Diluted EPS | $3.21 | $2.78 | $5.96 | $5.54 |
Financial position and cash flow
- Cash and cash equivalents were $68.9 million at September 29, 2018, versus $65.6 million at December 30, 2017. Current assets were $220.6 million and current liabilities $131.6 million.
- Operating cash flow for the first 39 weeks was $108.1 million, essentially unchanged from $108.2 million a year earlier. Capital expenditures were $38.8 million, versus $23.4 million; investing cash outflow was $38.6 million.
- Financing cash outflow was $66.2 million, including $88.3 million of Class A share repurchases, partly offset by $21.5 million from stock-option exercises. Cash increased by $3.3 million over the period.
- The company reported no borrowings under its $150 million revolving credit facility, which was extended to March 31, 2023; the facility was fully available and the company reported compliance with its covenants. The filing does not clearly state total interest-bearing debt across all arrangements.
- Total liabilities were $189.2 million. Non-cancelable contractual obligations totaled $229.3 million, including advertising, ingredient, equipment and lease commitments.
Material changes and management commentary
- Quarterly net revenue rose 24.2%; shipments increased 23.5%, while distributor depletions (sales to retailers) rose approximately 18%. For the first 39 weeks, revenue rose 17.3%, shipments 16% and depletions approximately 13%.
- Shipments grew faster than depletions in Q3, leaving distributor inventory higher than a year earlier. Management considered inventory appropriate to support forecast brand growth and innovation. About 77% of volume was in the Freshest Beer Program.
- Gross margin fell as higher processing costs, temporary labor and packaging costs outweighed pricing and lower excise taxes. Advertising, promotional and selling expenses rose 37.9% in Q3 and 30.5% year to date, reflecting brand investment and higher freight costs. These expenses, along with higher G&A, contributed to lower operating income despite higher sales.
- Lower income-tax expense supported net income growth: the 2018 periods included a $4.5 million one-time benefit from tax accounting method changes, as well as stock-compensation tax benefits. The company also cited the Tax Cuts and Jobs Act. Accordingly, earnings growth should be considered alongside weaker operating income and margins.
Outlook, risks and unusual items
- For 2018, management raised its estimated depletion and shipment growth range to 12%–15% from 7%–12%; narrowed targeted national price increases to 1%–2%; and lowered expected gross margin to 50%–52% from 51%–53%. It forecast non-GAAP diluted EPS of $7.10–$7.70, excluding ASU 2016-09 effects, and an approximately 24% non-GAAP effective tax rate that includes the one-time tax-method benefit.
- Preliminary 2019 assumptions included high-single-digit to low-double-digit depletion and shipment growth, price increases of 0%–3% per barrel, gross margin of 51%–53%, and capital expenditures of $100–$120 million. The filing says advertising and promotional spending would increase by $25–$35 million, but labels this estimate “for the full year 2018” within the 2019 outlook discussion; the applicable year is unclear from the filing text. The same section labels its approximately 27% tax-rate estimate as full-year 2018 while describing 2019 assumptions, so the intended period is unclear.
- Management estimated 2018 capital expenditures of $65–$75 million. It expected owned breweries and existing third-party capacity to meet 2018 and 2019 requirements. An October 11, 2018 amendment to a brewing services agreement added a capacity commitment and required up to $4 million in capital improvements in each of 2018 and 2019.
- Key uncertainties include whether increased brand advertising produces sales growth, pressure from production and freight costs, execution of growth expectations, and variability in tax benefits. Management reported no material pending or threatened litigation and no off-balance-sheet arrangements. It stated there had been no significant change in interest-rate or foreign-currency exposure.
- Revenue-standard adoption changed the timing of certain promotional discount recognition and reduced retained earnings by a $1.0 million cumulative adjustment, net of tax. The company expected no material ongoing impact. It expected to adopt the new lease standard in 2019; disclosed lease obligations were $26.6 million at quarter-end.
Important facts for investors to verify
- Whether shipment growth continues to track distributor depletions and whether distributor inventories normalize.
- Whether increased marketing, freight, production and packaging costs continue to pressure gross and operating margins.
- Delivery against the revised 2018 outlook and the preliminary 2019 assumptions, noting the outlook-period inconsistencies in the filing.
- The effect of one-time tax items and stock-option tax benefits on reported earnings compared with underlying operating performance.
- Capital spending, contractual commitments, share repurchases and liquidity needs; the company repurchased approximately 350,000 shares for $88.3 million during the first 39 weeks.