Business context and reporting period
The Boston Beer Company, Inc. (Boston Beer) filed this Form 10-K for the 52-week fiscal year ended December 26, 2015. It brews and sells Samuel Adams beers, Twisted Tea flavored malt beverages, Angry Orchard hard cider and Alchemy & Science brands, mainly through U.S. distributors. The filing also provides unaudited results for the fourth quarter, which was 13 weeks.
Boston Beer sold 4.256 million barrels in 2015; more than 95% of core-brand volume was brewed and packaged at company-owned breweries. Samuel Adams sales declined, partly offset by growth in Twisted Tea, Angry Orchard, Coney Island and Traveler brands.
Financial results and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue before excise taxes | $1,024.0 million | $966.5 million |
| Net revenue | $959.9 million | $903.0 million |
| Gross profit / margin | $501.6 million / 52.3% | $465.0 million / 51.5% |
| Operating income / margin | $156.2 million / 16.3% | $146.6 million / 16.2% |
| Net income | $98.4 million | $90.7 million |
| Diluted EPS | $7.25 | $6.69 |
| Operating cash flow | $168.7 million | $141.2 million |
- Net revenue rose 6.3%; shipments of core brands rose 3.6%, depletions rose about 4%, and net revenue per barrel increased 2.6% to $226.18.
- Cost of goods sold was 47.7% of net revenue, versus 48.5% in 2014. Advertising, promotional and selling expense increased 9.2% to $273.6 million, driven mainly by media, sales staffing and local marketing.
- Fourth-quarter net revenue was $215.1 million versus $217.8 million a year earlier; barrels sold were 958,000 versus 983,000. Net income was $16.1 million versus $19.1 million, and diluted EPS was $1.21 versus $1.40.
- Cash and cash equivalents were $94.2 million at year-end, up from $76.4 million. Investing activities used $74.2 million, primarily for brewery equipment and capacity; operating cash flow less property and equipment purchases was approximately $94.5 million.
- Working capital was $112.4 million. Total debt and capital lease obligations were approximately $0.5 million; no borrowings were outstanding on the $150 million revolving credit facility, which runs to March 2019. The company reported covenant compliance.
- Share repurchases totaled about 616,700 shares for $138.7 million in 2015. The board later raised the program limit to $575 million; approximately $95.9 million remained as of February 12, 2016.
Material changes, outlook and risks
Profit and net revenue increased year over year, with gross margin improving from 51.5% to 52.3%. Growth moderated from 2014: core-brand shipment growth was 3.6% in 2015 versus 20.3% in 2014, and depletions growth was about 4% versus about 22%. The filing attributes 2015 growth primarily to non-Samuel Adams brands and notes Samuel Adams declines. The Freshest Beer Program reduced distributor inventory and lowered year-end shipments by an estimated 87,000 case equivalents in 2015.
For 2016, management targeted diluted EPS of $7.60–$8.00, mid-single-digit growth in depletions and shipments, national price increases of 1%–2%, gross margin of 52%–54%, and an effective tax rate of about 37%. It expected advertising, promotional and selling expenses to rise $10–$20 million and capital expenditures of $60–$80 million. The 2016 fiscal year has 53 weeks, compared with 52 in 2015. Depletions for the six weeks ended February 6, 2016 were estimated to be down about 3% year over year. Management cautioned that actual results could vary significantly and higher brand investment may not increase sales.
- Competitive and execution risks: Craft-brewer growth, major brewer acquisitions and competition for distributor attention, shelf space and contract-brewing capacity may pressure share, pricing and costs. Management cited prior shortages, service issues, supply-chain strain and brewery capacity operating near limits in peak periods.
- Supply and cost exposure: The company relies on concentrated sources for some malt and packaging materials and faces agricultural crop, ingredient-price and foreign-exchange risks. It does not hedge foreign-currency exposure; a modeled 10% adverse exchange-rate change could affect future cash flows by about $5.3 million.
- Commitments: Non-cancelable contractual obligations totaled $207.5 million, including $63.7 million for hops, barley and wheat and $48.7 million for apples and other ingredients. Hops purchase commitments were $50.0 million. Management’s inventory and purchase-commitment estimates depend on forecasts of demand, product mix and usage.
- Other disclosures: The company reported no material off-balance-sheet arrangements and no pending or threatened litigation expected to materially affect results. The Class B shares, held by founder and chairman C. James Koch, carry voting control over most shareholder matters. The financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether 2016 depletion and shipment trends recover after the early-year decline, and whether growth can offset continued Samuel Adams weakness.
- Whether the EPS, volume, margin, pricing, marketing-spend and capital-expenditure targets are achieved, including the effect of the extra fiscal week.
- Whether brewery capacity and the Freshest Beer Program can support growth without recurring shortages, service problems or higher logistics costs.
- Whether ingredient availability, crop conditions, packaging costs and unhedged currency exposure affect margins or require inventory reserves.
- How continued buybacks and planned capital investment affect cash balances, returns on invested capital and financial flexibility.
- The implications of Class B voting control and the company’s customer, distributor and supplier concentration.