Business context and reporting period
The Boston Beer Company, Inc. brews and sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Twisted Tea, Angry Orchard, Truly Spiked & Sparkling, Traveler and Coney Island. This Form 10-Q covers the 13 and 39 weeks ended September 24, 2016, compared with the periods ended September 26, 2015. Financial amounts below are in millions of dollars except per-share data and barrel volumes.
Financial results and position
| Metric | 13 weeks 2016 | 13 weeks 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Revenue before excise taxes | $271.2 | $312.6 | $734.5 | $794.2 |
| Net revenue | $253.4 | $293.1 | $687.1 | $744.8 |
| Gross profit | $133.6 | $157.0 | $352.0 | $392.9 |
| Operating income | $50.3 | $60.9 | $103.3 | $129.8 |
| Net income | $31.5 | $38.6 | $65.2 | $82.3 |
| Diluted EPS | $2.48 | $2.85 | $5.05 | $6.02 |
- Quarterly shipments fell 11.9% to 1.131 million barrels; year-to-date shipments declined 7.7% to 3.045 million barrels. Depletions decreased approximately 8% and 6%, respectively.
- Gross margin was 52.7% for the quarter (53.6% prior year) and 51.2% year to date (52.7%). For the quarter, gross profit per barrel declined mainly because of lower net revenue per barrel; year to date, higher unit costs were the primary pressure.
- Quarterly advertising, promotional and selling expense decreased 18.4% to $63.8 million; year-to-date expense decreased 11.2% to $186.3 million. General and administrative expense rose 10.0% for the quarter and 17.7% year to date, primarily from higher stock compensation, compensation and benefits, and facilities costs.
- Operating cash flow was $108.4 million year to date, versus $142.5 million; capital spending was $37.1 million versus $55.6 million. Cash and cash equivalents were $77.3 million at September 24, down from $94.2 million at December 26, 2015.
- At September 24, current assets were $204.6 million and current liabilities $106.3 million. Debt and capital lease obligations totaled approximately $0.5 million. The $150 million revolving credit facility, expiring March 2019, had no borrowings and was fully available; the company reported covenant compliance.
- Share repurchases used $138.1 million of cash year to date. By October 14, the company reported cumulative repurchases of approximately 12.3 million shares for $584.5 million, with $196.5 million remaining under the $781 million authorization.
Changes, outlook and risks
Net revenue declined 13.5% in the quarter and 7.8% year to date, primarily because of lower shipments and product mix, partly offset by price increases. Samuel Adams, Angry Orchard, Coney Island and Traveler were among the brands with shipment or depletion declines; Twisted Tea and Truly generally provided offsets. Management said distributor inventory levels were appropriate. Approximately 77% of volume was covered by the Freshest Beer Program.
- 2016 outlook: Management narrowed and lowered its diluted EPS target to $6.30–$6.70 from $6.40–$7.00. It expected depletions and shipments to decline 6%–2%, gross margin of 50%–52%, price increases per barrel of 1%–2%, and advertising, promotional and selling expense to range from a $10 million decrease to flat. Estimated effective tax rate was approximately 36%. The 2016 fiscal year has 53 weeks.
- Preliminary 2017 outlook: Depletions and shipments expected to range from a low-single-digit decline to a low-single-digit increase; price increases of 1%–2%; gross margin of 51%–53%; and advertising, promotional and selling expense increases of $10 million–$20 million. Estimated effective tax rate was 36.3%, excluding the uncertain impact of new stock-compensation accounting. Planned capital expenditures were $40 million–$60 million for 2017; 2016 estimates were revised to $55 million–$65 million.
- Management cautioned that increased brand investment may not generate volume growth and that actual results could differ materially from targets. Other exposures include demand and product-mix changes, fixed-cost absorption, input and foreign-exchange costs, and the effectiveness of advertising. The company reported no derivatives or significant change in interest-rate or currency exposure.
- Non-cancelable contract obligations totaled $207.1 million, including $94.3 million for hops, barley and wheat, $39.9 million for apples and other ingredients, and $26.8 million for advertising. Hops commitments were $65.0 million, extending through crop year 2022; the company does not hedge currency exposure on those purchases.
- The company reported no pending or threatened litigation expected to have a material adverse effect and no material off-balance-sheet arrangements. A $12.0 million IRS tax refund was received in the first quarter. Subsequent to quarter-end, vacant land was sold for $4.3 million net; a $1.0 million gain was expected to be recognized in the fourth quarter. The board also increased the repurchase authorization by $180 million in October.
Important facts for investors to verify
- Whether shipment and depletion declines stabilize, particularly for Samuel Adams, Angry Orchard and other weakening brands, and whether distributor inventory remains appropriate.
- Whether the lower 2016 EPS and volume targets are achieved and how 2017 preliminary assumptions develop.
- Gross-margin trends, including fixed-cost absorption, product mix, input costs and the effect of price increases.
- The cash and liquidity impact of continued share repurchases, planned capital expenditures, and the company’s $207.1 million contractual obligations.
- The potential impact of new accounting standards, particularly stock-compensation accounting on 2017 tax expense and cash-flow presentation; management said the impact was not yet predictable.