Boston Beer Company, Inc. — Q1 2014 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2014, compared with the thirteen weeks ended March 30, 2013. Boston Beer brews and sells alcoholic beverages, including Samuel Adams, Twisted Tea and Angry Orchard.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue before excise taxes | $197.4 million | $146.4 million | +34.8% |
| Net revenue | $183.8 million | $135.9 million | +35.2% |
| Gross profit | $90.5 million | $67.8 million | +33.5% |
| Operating income | $13.4 million | $9.7 million | +38.2% |
| Net income | $8.3 million | $6.9 million | +20.3% |
| Diluted earnings per share | $0.62 | $0.51 | +21.6% |
- Consolidated gross margin was approximately 49.2%, versus 49.9%. Core-product gross margin was 49%, versus 50%; core gross profit per barrel rose to $108.31 from $107.19.
- Core shipments were 835,000 barrels, up 32%; core-product depletions (wholesaler sales to retailers) rose approximately 34%. Net revenue per core barrel increased 2.5% to $219.99.
- Advertising, promotional and selling expense rose 41% to $61.3 million, reflecting increased brand investment, sales personnel and freight. General and administrative expense increased 8.3% to $15.9 million.
- The effective tax rate was 37.3%, compared with approximately 27.7%; management attributed the increase primarily to the impact of a federal tax settlement in 2013.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $28.0 million at March 29, down from $49.5 million at December 28, 2013. Operating activities used $8.8 million; investing activities used $44.1 million, largely for brewery capacity, efficiency and keg investments; financing activities provided $31.4 million.
- Capital expenditures were $44.2 million in the quarter. Property, plant and equipment, net, increased to $309.1 million from $266.6 million.
- Total debt and capital lease obligations were approximately $0.6 million. The company had no borrowings on its amended $150 million revolving credit facility, available through March 31, 2019, and reported compliance with its covenants.
- Current assets were $156.5 million and current liabilities $98.2 million. Total liabilities were $135.3 million; stockholders’ equity was $344.1 million.
Outlook, commentary and risks
- Management maintained 2014 diluted EPS guidance of $6.00–$6.40; expected full-year depletion and shipment growth of 16%–20%, price increases of approximately 2%, gross margins of 51%–53%, and an effective tax rate of approximately 38%.
- Management estimated full-year advertising, promotional and selling expense increases of $34–$42 million, excluding additional freight increases. It expected $160–$200 million in 2014 capital expenditures and noted actual spending could be significantly higher to support growth.
- Estimated 2014 investment in Alchemy & Science existing brands included $4–$7 million of advertising and promotional expense and $7–$9 million of capital investment. Management cautioned that brand volume was unlikely to cover these and other project costs.
- Non-cancelable purchase commitments totaled approximately $170.2 million. Environmental remediation arrangements included estimated costs of approximately $2.6 million and $0.7 million; management said additional remediation costs above the currently estimated amount were not expected to materially harm financial position or results.
- Management said wholesaler inventory levels were appropriate. It also cautioned that advertising investment may not generate sales growth and that forward-looking estimates are subject to significant uncertainty. No material adverse litigation was disclosed.
Important facts for investors to verify
- Whether strong shipment and depletion growth continues, and whether wholesaler inventory remains appropriate.
- Whether gross-margin guidance is achievable amid higher product mix and brewery processing costs, and whether planned marketing spending produces sales growth.
- Progress against EPS, growth, tax-rate and capital-expenditure guidance; actual capital spending may exceed the stated range.
- Cash conversion and working-capital trends, particularly rising receivables and inventories, alongside the $170.2 million of purchase commitments.
- Developments in the IRS examination of 2012 returns, state tax audits and Cincinnati-area remediation obligations.