Business context and reporting period
The Boston Beer Company, Inc. sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Twisted Tea, Angry Orchard and brands produced through Alchemy & Science. This unaudited Form 10-Q covers the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. Amounts below are in millions except per-share data and where noted.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue before excise taxes | $146.4 | $122.9 | +19% |
| Net revenue | $135.9 | $113.3 | +20% |
| Gross profit | $67.8 | $61.8 | +10% |
| Operating income | $9.7 | $11.8 | -18% |
| Net income | $6.9 | $7.5 | -8% |
| Diluted EPS | $0.51 | $0.56 | -9% |
| Operating cash flow | $(12.8) | $1.8 | Declined |
| Capital expenditures | $21.2 | $13.5 | Increased |
- Shipment volume rose 18% to 636,000 barrels; core-brand shipments increased 18% to 632,000 barrels. Core-product depletions increased approximately 16%.
- Core net revenue per barrel increased 2% to $214.70. However, core gross profit per barrel fell to $107.19 from $115.25, and core gross margin declined to 50% from 55%.
- For the consolidated company, gross margin was approximately 49.9% of net revenue, versus 54.6% in the prior-year quarter. Operating margin was approximately 7.1%, versus 10.5%.
- Cash and cash equivalents were $32.3 at March 30, down from $74.5 at December 29, 2012. Total assets were $345.3; stockholders’ equity was $245.6.
- Operating cash use reflected a $22.2 net increase in operating assets and liabilities, including inventory and prepaid expenses and other assets. Investing cash use was $21.1, primarily for brewery equipment; financing cash use was $8.2, including $14.7 of Class A share repurchases.
- Total debt and capital lease obligations were approximately $0.8; the $50.0 revolving credit facility had no borrowings and was fully available. Current liabilities were $74.8 and current assets were $132.3.
Changes, outlook and key considerations
- Revenue growth was driven mainly by higher shipments and pricing. Growth in Angry Orchard and Twisted Tea, along with Samuel Adams, contributed to core shipment gains; some Samuel Adams styles had declining depletions.
- Higher brewery processing and ingredient costs and product/package mix contributed to increased core cost of goods sold per barrel. Core gross margin also reflected customer program and incentive costs, partly offset by pricing and package mix.
- Advertising, promotional and selling expense was $43.4, up 13%; the filing cites planned brand investment, additional sales personnel and higher freight from increased volumes. General and administrative expense rose 27% to $14.6, primarily on salary, benefit and consulting costs.
- The first-quarter effective tax rate was 27.7%, favorably affected by an IRS audit settlement and reinstatement of the 2012 federal R&D credit. Management expected a roughly 37% full-year 2013 tax rate.
- Management maintained 2013 diluted EPS guidance of $4.70–$5.10 and expected shipment and depletion growth of approximately 10%–15%. It anticipated pricing increases of 1%–2%, full-year gross margin of 53%–55%, and $18–$26 of year-over-year increases in advertising, promotional and selling expense, excluding higher freight.
- Estimated 2013 capital expenditures were $70–$85, mainly for brewery investments and kegs. Management expected existing owned and contracted brewing capacity to cover 2013 requirements; longer-term annual capital investment was estimated at $30–$50. These estimates and guidance are forward-looking and actual results may differ.
- Outstanding non-cancelable purchase commitments totaled $109.3, including hops and malt, equipment, bottles and advertising. The company noted that certain environmental remediation costs above estimated amounts would not be reimbursed; management estimated existing remediation reserves and related amounts at approximately $3.2 and did not expect additional costs above that estimate to materially affect results or financial position.
- The company’s appeal concerning claims related to the 2009 change in ownership of the High Falls brewery was denied. Management reported no other pending or threatened litigation expected to materially adversely affect financial condition or results. No off-balance-sheet arrangements were reported, and management said liquidity resources were sufficient for expected cash needs.
Important facts for investors to verify
- Whether shipment and depletion growth, EPS guidance and the 53%–55% full-year gross-margin outlook were achieved, particularly given cost and pricing pressures.
- Whether first-quarter cash use, elevated capital spending and planned share repurchases materially affect cash balances and liquidity during the year.
- How ingredient, processing, freight and product-mix costs develop, and whether planned price increases and brand spending support growth without further margin pressure.
- The timing and funding of the $109.3 in purchase commitments, the estimated environmental remediation obligations, and any developments related to the denied High Falls appeal.
- The filing reports a $50.0 revolving facility with no borrowings at quarter-end; verify availability and covenant compliance in subsequent filings.