Business context and reporting period
The Boston Beer Company, Inc. filed this Form 10-K for the 52-week fiscal year ended December 29, 2018. It produces and sells beer, hard cider, flavored malt beverages and hard seltzer, primarily in the United States. Major brands include Samuel Adams, Twisted Tea, Angry Orchard and Truly. The company sold approximately 4.3 million barrels in 2018.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue before excise taxes | $1,057.5 million | $921.7 million |
| Net revenue | $995.6 million | $863.0 million |
| Gross profit / margin | $512.2 million / 51.4% | $449.9 million / 52.1% |
| Operating income / margin | $115.9 million / 11.6% | $115.7 million / 13.4% |
| Net income | $92.7 million | $99.0 million |
| Diluted earnings per share | $7.82 | $8.09 |
| Operating cash flow | $163.4 million | $136.0 million |
| Cash and cash equivalents at year-end | $108.4 million | $65.6 million |
| Working capital | $111.1 million | $66.6 million |
| Total assets / stockholders’ equity | $639.9 million / $460.3 million | $569.6 million / $423.5 million |
Shipments increased 13.7% to 4.286 million barrels; distributor depletions rose approximately 13%. Net revenue per barrel increased 1.4% to $232.30, reflecting mix, pricing and lower excise taxes. The filing reports no borrowings under the $150 million revolving credit facility at year-end; it matures in 2023. Capital expenditures were $55.5 million. The company repurchased approximately 350,000 shares for $88.3 million.
Material changes versus the prior comparable period
- Net revenue rose 15.4%, driven mainly by higher shipments. Growth in Truly, Twisted Tea and Angry Orchard more than offset declines in Samuel Adams.
- Gross margin fell 0.7 percentage points. Cost of goods sold per barrel increased 2.9%, reflecting higher third-party processing, temporary labor and packaging costs, partly offset by brewery cost savings.
- Advertising, promotional and selling expense increased 17.9% to $304.9 million, including higher marketing and freight costs. General and administrative expense rose 24.2% to $90.9 million.
- Operating income was nearly unchanged despite sales growth, as higher operating expenses absorbed most of the increase in gross profit. Net income fell 6.4%; the effective tax rate increased to 20.3% from 14.7% in 2017.
- Operating cash flow increased by $27.5 million, while inventory rose to $70.2 million from $50.7 million as the company supported higher demand. Cash used for investing increased to $55.3 million.
Outlook, management commentary, risks and unusual items
Management forecast 2019 shipment and depletion growth of 8%–13%, non-GAAP diluted EPS of $8–$9, gross margin of 51%–53%, and national price increases of 1%–3%. It planned to increase advertising, promotional and selling expense by $20–$30 million, excluding any increases in freight costs, and estimated capital expenditures of $100–$120 million. The EPS and tax-rate outlook exclude the potential impact of ASU 2016-09; the company said a forward-looking reconciliation to GAAP could not be provided without unreasonable effort. Depletions for the six weeks ended February 9, 2019 were estimated to be up approximately 12% year over year.
Key risks include intense competition and changing consumer preferences; reliance on independent distributors; production concentration at company-owned breweries, particularly the Pennsylvania facility; supply constraints and price volatility in hops, agricultural inputs and packaging; and unhedged foreign-currency exposure. Management noted sleek-can supply pressures and supply-chain constraints, and expected distributor inventory to rise in the first half of 2019 before returning to 2018 levels in the second half. The company estimated a 10% adverse currency-rate movement could negatively affect future cash flows by approximately $3.9 million. It reported no pending or threatened litigation expected to have a material adverse effect.
Unusual tax items affect comparison: 2017 included a $20.3 million one-time benefit related to the Tax Cuts and Jobs Act; 2018 included a $4.5 million benefit from tax accounting method changes and a $6.1 million federal excise-tax reduction. The company recorded $0.7 million of asset impairment charges in 2018, primarily for brewery equipment. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether 2019 shipment and depletion growth of 8%–13% materializes, and whether growth remains broad-based across brands.
- Whether planned marketing and capital spending supports growth without further reducing operating margins or cash generation.
- Whether brewery capacity, contract brewing and sleek-can supply can meet seasonal demand; review the planned increase in distributor inventories.
- How input-cost inflation, foreign exchange movements and the expiration of reduced federal excise-tax rates after 2019 may affect margins.
- The company’s capital allocation: $90.3 million remained under the share-repurchase limit, and the company did not anticipate paying dividends in the foreseeable future.
- Governance and voting structure: Class B shares held by founder C. James Koch carry majority voting control, while Class A shares have limited voting rights.