The Boston Beer Company, Inc. — Q3 2012 Form 10-Q
Business context and period. Boston Beer sells alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and brands developed by its Alchemy & Science subsidiary, in the U.S. and selected international markets. This unaudited filing covers the 13 and 39 weeks ended September 29, 2012, compared with the corresponding periods ended September 24, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Revenue before excise taxes | $180.4 | $147.0 | $463.0 | $404.4 |
| Net revenue | $166.4 | $134.8 | $427.2 | $370.9 |
| Gross profit | $93.2 | $76.0 | $235.4 | $204.5 |
| Operating income | $33.3 | $26.4 | $68.6 | $77.9 |
| Net income | $20.8 | $16.3 | $42.6 | $48.3 |
| Diluted EPS | $1.53 | $1.19 | $3.14 | $3.48 |
- Q3 net revenue rose 23.5%; total shipments increased 17.7% to 778,000 barrels. Core-brand depletions rose about 15% in the quarter and an estimated 11% year to date.
- Q3 core-brand net revenue per barrel increased 5.1% to $215.16. Core gross margin was 56.1%, versus 56.4%; year-to-date core gross margin was 55.2% in both years. Ingredient costs, including barley and hops, increased, partly offset by volume-related efficiencies.
- Q3 advertising, promotional and selling expense increased 21.1% to $47.6 million; general and administrative expense rose 19.5% to $12.3 million. Year-to-date advertising, promotional and selling expense was $130.2 million and G&A was $36.6 million.
- Cash and cash equivalents were $62.8 million at September 29, 2012, compared with $49.5 million at year-end 2011. Current assets were $150.5 million and current liabilities $83.5 million. Total assets were $336.0 million; total liabilities $105.6 million; stockholders’ equity $230.4 million.
- For the first 39 weeks, operating cash flow was $64.8 million, investing cash flow was negative $51.7 million, and financing cash flow was positive $0.3 million. Capital expenditures were $49.5 million. Cash increased $13.4 million during the period.
- Debt consisted of a $628,000 term note at 4.25%, payable through 2021 and secured by restricted cash. The $50 million revolving credit facility, expiring March 2015, had no borrowings; the company reported covenant compliance.
Material changes and notable items
- Year-to-date operating income and net income declined despite higher net revenue. The prior-year period included $20.5 million of settlement proceeds from the former glass-bottle supplier, recorded as an offset to operating expenses, related to the 2008 product recall. The parties settled all claims; the recall reserve was fully used or released by September 2012.
- Year-to-date shipment volume increased 11.0% to 2.013 million barrels. Growth in Angry Orchard, Samuel Adams Seasonals and Twisted Tea was partly offset by declines in certain other Samuel Adams styles.
- Investing outflows increased substantially from 2011, primarily reflecting brewery equipment upgrades. The company acquired substantially all assets of Angel City Brewing for a preliminary purchase price of $1.9 million; the allocation included $1.161 million of goodwill.
- The company repurchased about 122,000 Class A shares for $12.6 million in the first 39 weeks. On October 1, the board raised the buyback authorization ceiling from $275 million to $300 million. By October 26, cumulative repurchases totaled $267.1 million, with $32.9 million remaining under the limit.
Outlook, risks and contingencies
- 2012 outlook: diluted EPS of $3.80–$4.20; depletion growth of 8%–12%; shipment growth of 7%–10%; price increases of about 3% per barrel; and gross margin of 54%–56%. Estimated capital expenditures were revised to $65–$75 million.
- The company raised its estimate for 2012 growth in advertising, promotional and selling expense, excluding freight, to $14–$18 million. It estimated Alchemy & Science new-brand startup costs of $3–$5 million, with $2–$3 million included in that expense estimate.
- 2013 outlook: depletion and shipment growth in the high single digits; price increases of 1%–2%; gross margin of 53%–55%; and advertising, promotional and selling expense growth of $6–$12 million, excluding freight. Estimated capital expenditures were $55–$65 million. Management cautioned that investment may not produce volume growth and that future Alchemy & Science projects could add costs.
- Management expected cash, future operating cash flow and the unused credit facility to fund future needs. Longer term, it anticipated annual capital investment of $30–$45 million. These are forward-looking estimates and actual results may differ materially.
- At September 29, outstanding commitments included $20.4 million for advertising, $29.9 million for hops, $15.0 million for barley, wheat and malt, and $20.1 million of other non-cancelable purchases. Bottle commitments included a further $50.6 million minimum commitment for 2013 production estimates provided October 8.
- Environmental remediation arrangements at Cincinnati included estimated costs of approximately $1.8 million; management said costs above that estimate were not expected to materially adversely affect results or financial position. The company disclosed ongoing IRS examinations of 2007–2009 returns and state audits. A $1.3 million arbitration award related to a former brewery contract was not recorded because collection was doubtful.
- The filing reported no material litigation expected to adversely affect the company, no off-balance-sheet arrangements, and no significant change in interest-rate or foreign-currency exposures. It cautioned that additional product-quality issues or recalls cannot be ruled out. Broader risk factors are incorporated from the 2011 Form 10-K.
Important facts for investors to verify
- Whether shipment and depletion growth, especially in Angry Orchard and other faster-growing brands, continues without excessive wholesaler inventory changes.
- Whether pricing and operational efficiencies offset higher ingredient, packaging, freight and processing costs, and whether the 2012–2013 gross-margin outlook is achieved.
- Whether increased marketing, Alchemy & Science investment and brewery capital spending generate sufficient volume and returns.
- The effects of the 2011 recall-settlement comparison on year-over-year earnings and cash flow, alongside the company’s ongoing share repurchases.
- Updates on IRS and state tax examinations, environmental remediation costs, purchase commitments, and the final Angel City acquisition accounting.