Boston Beer Company, Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2018; comparisons are with the thirteen weeks ended April 1, 2017 unless noted. The company brews and sells beer, cider, hard tea and related beverages in the U.S. and selected international markets. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Gross revenue was $201.8 million; net revenue after excise taxes was $190.5 million, up 17.8%. Shipments rose 15% to 813,000 barrels; net revenue per barrel increased 2.4% to $234.37.
- Profit and margins: Gross profit was $96.1 million, up 25.9%, and gross margin increased to 50.5% from 47.2%. Operating income was $9.2 million versus $4.0 million; net income was $9.3 million versus $5.7 million. Diluted EPS was $0.78 versus $0.45.
- Costs: Cost of goods sold per barrel declined to $116.12 from $120.79, reflecting brewery cost savings and favorable fixed-cost absorption, partly offset by product mix and higher ingredient and packaging costs. Advertising, promotional and selling expense rose 25.6% to $67.5 million, increasing to 35.5% of net revenue from 33.2%.
- Cash flow: Operating cash use was $10.4 million, versus $5.0 million used a year earlier. Investing cash use was $11.4 million, mainly capital spending; financing provided $2.8 million. Cash declined to $46.6 million from $65.6 million at year-end.
- Liquidity and debt: Current assets were $174.9 million and current liabilities $99.9 million. No borrowings were outstanding on the $150 million revolving credit facility, extended to March 31, 2023; it was fully available and the company reported covenant compliance. The filing does not report a separate total-debt figure.
- Balance sheet and capital returns: Total assets were $579.9 million and total liabilities $143.0 million at March 31. The company repurchased 91,500 Class A shares during the quarter. Through April 20, cumulative repurchases were approximately 13.6 million shares for $774.9 million, with $156.1 million remaining under the board’s expenditure limit.
Material changes versus the prior period
- Depletions—distributor sales to retailers—rose approximately 8%, slower than shipment growth of 15%; distributor inventory was therefore higher year over year. Management said inventory levels were appropriate to support forecasted growth and new products.
- Growth was led by Angry Orchard, Truly Spiked & Sparkling and Twisted Tea; Samuel Adams depletions declined. Net revenue growth also reflected higher volume, package mix and pricing.
- Gross margin improved, while selling and promotional spending increased substantially. Management cited increased local marketing, point-of-sale and media investment, as well as higher freight rates and volumes.
- Operating cash use increased, principally reflecting working-capital needs, including a $16.6 million increase in accounts receivable and higher inventory.
- The company adopted Topic 606 on December 31, 2017 using the modified retrospective method. It recorded a $1.0 million after-tax cumulative adjustment to retained earnings for earlier recognition of certain promotional discounts; comparative periods were not restated.
Outlook, commentary and risks
- 2018 outlook: Management estimated full-year depletions and shipments growth of 0% to 6%, national price increases of 0% to 2%, and gross margin of 52% to 54%. It projected non-GAAP diluted EPS of $6.30 to $7.30 and a non-GAAP effective tax rate of approximately 28%, both excluding ASU 2016-09 effects. These are estimates, not guarantees; the company said it could not provide a forward-looking GAAP reconciliation without unreasonable effort.
- Management planned to increase advertising, promotional and selling expenses by $15 million to $25 million for 2018, excluding freight changes, and estimated capital expenditures of $55 million to $65 million. It said existing company breweries and contracted third-party capacity should cover 2018 requirements.
- Advertising investments may not generate sales growth. Shipment growth exceeding depletions warrants monitoring for distributor inventory changes. Costs and supply commitments—including $193.6 million of non-cancelable obligations, including $58.1 million for hops, barley and wheat and $68.4 million for advertising—are also relevant.
- The company had no material-adverse-effect litigation pending or threatened, but the IRS was examining its 2015 federal return and two states were auditing it. It reported no significant change in interest-rate or foreign-currency market exposure and does not use derivatives to hedge those exposures.
- David Burwick became president and CEO on April 2, 2018, after the quarter. The filing disclosed planned second-quarter equity awards and compensation, including $14.75 million of restricted stock awards and a $1.0 million performance-based option award at grant-date value.
- The quarter’s $0.2 million income tax benefit included a $2.7 million benefit from stock-based compensation tax effects under ASU 2016-09, partly offset by other tax expense. The effective tax rate excluding that accounting impact was 28.0%, compared with 46.8% a year earlier.
Important facts for investors to verify
- Whether shipment growth continues to track depletions and distributor inventory remains at appropriate levels.
- Whether higher brand investment, freight and other selling costs are consistent with the company’s gross-margin and EPS outlook.
- Operating cash flow, working-capital trends, capital spending and the pace of share repurchases.
- Progress against the 2018 growth, margin, pricing and non-GAAP EPS targets, including the effect of ASU 2016-09 on reported GAAP results.
- Material developments in tax examinations, supply commitments, and the new CEO’s compensation and equity awards.