Boston Beer Company, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The company brews and sells alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and Truly. This unaudited report covers the 13 weeks ended April 1, 2017; comparisons are with the 13 weeks ended March 26, 2016. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue before excise taxes | $172.4 million | $202.0 million | Down 14.6% |
| Net revenue | $161.7 million | $188.8 million | Down 14.4% |
| Barrels sold | 707,000 | 834,000 | Down 15.3% |
| Gross profit / margin | $76.3 million / 47.2% | $91.5 million / 48.5% | Margin down 1.3 percentage points |
| Operating income / margin | $4.0 million / 2.5% | $11.2 million / 6.0% | Down 64.2% |
| Net income | $5.7 million | $7.0 million | Down 18.8% |
| Diluted EPS | $0.45 | $0.53 | Down $0.08 |
| Operating cash flow | $(5.0) million | $9.3 million | Cash use in 2017 |
| Capital expenditures | $7.0 million | $13.0 million | Down $6.0 million |
Net revenue per barrel rose 1.1% to $228.83, primarily reflecting price increases. Cost of goods sold per barrel increased $4.13 to $120.79, driven mainly by unfavorable fixed-cost absorption and product mix, partly offset by brewery cost savings. Advertising, promotional and selling expense fell 9.3% to $53.8 million, but increased as a share of net revenue to 33.2% from 31.4%. General and administrative expense declined 11.8% to $18.6 million.
Cash and cash equivalents were $59.9 million at April 1, down from $91.0 million at year-end 2016. The quarter’s $31.1 million cash decrease reflected operating cash use, $7.0 million of capital expenditures and $19.1 million of net financing cash use, including $33.3 million of share repurchases partly offset by option-exercise proceeds. The company reported $84.5 million of current liabilities and $166.1 million of current assets. It had no revolving-credit borrowings, with the full $150 million facility available through March 31, 2019; a $0.34 million note payable remained. Management said available cash, expected operating cash flow and the credit line should fund future requirements.
Material changes and management commentary
- Shipments declined mainly because of lower Samuel Adams and Angry Orchard volume; increases in Twisted Tea and Truly partially offset the declines. Depletions fell approximately 14%. Management considered distributor inventory levels appropriate.
- Net income included a $3.6 million income-tax benefit from adopting ASU 2016-09, concerning stock-based compensation. Excluding that effect, the reported effective tax rate was 46.8%, versus 36.3% in Q1 2016. The quarter’s total income-tax benefit was $1.7 million.
- The company repurchased 212,288 Class A shares during the quarter for an average $156.89 per share. Through April 21, it had repurchased approximately 283,000 shares during the quarter and subsequent period for about $43.3 million; approximately $130 million remained under the board’s repurchase limit.
- Total non-cancelable contractual obligations were $155.8 million, including $66.4 million for hops, barley and wheat, $27.0 million for advertising, $22.4 million for apples and other ingredients, and $15.1 million for operating leases. The filing reports no pending or threatened litigation expected to materially harm financial condition or results.
Outlook, risks and unusual items
For 2017, management projected diluted EPS of $4.20–$6.20, excluding the impact of ASU 2016-09; depletions and shipments ranging from a 7% decline to a 1% increase; price increases of 1%–2%; gross margin of 51%–52%; and an effective tax rate of approximately 37%, excluding ASU 2016-09. The company expected to increase advertising, promotional and selling investment by $20–$30 million, excluding any freight-cost increases. Estimated capital expenditures were revised to $30–$50 million from a prior range of $40–$60 million. Management noted that results could vary significantly given the uncertain volume outlook, and that brand investment may not produce volume growth. Year-to-date depletions through April 15 were estimated down approximately 13%.
Risks and uncertainties include continued volume and brand-demand pressures, the effectiveness of marketing investment, input and production costs, and the effect of stock-option exercises on tax results. The company reported no off-balance-sheet arrangements and no material changes to contractual obligations outside the ordinary course. It does not use derivatives to hedge market risks; management reported no significant change in interest-rate or foreign-currency exposure since year-end.
Other notable filing matters: the company corrected the prior-year cash-flow classification of a $3 million share-repurchase payable, concluding the error was not material and did not affect prior-period earnings or financial position. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether shipment and depletion declines stabilize, and how performance differs across Samuel Adams, Angry Orchard, Twisted Tea and Truly.
- Whether 2017 EPS, volume, gross-margin, pricing and capital-spending outlook ranges remain achievable as the year progresses.
- The extent to which Q1 earnings and the full-year tax rate are affected by stock-option exercises and ASU 2016-09.
- Cash generation, share repurchases and remaining liquidity, including continued availability of the $150 million credit facility.
- Gross-margin trends, fixed-cost absorption, product mix, freight and planned increases in brand spending.