Business context and reporting period
The Boston Beer Company, Inc. brews and sells alcoholic beverages, including Samuel Adams, Twisted Tea and Angry Orchard. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 27, 2014; comparisons are with the corresponding periods ended September 28, 2013. Dollar amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | 13 weeks 2014 | 13 weeks 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net revenue | $269.7 | $216.4 | $685.2 | $533.7 |
| Gross profit | $143.0 | $115.4 | $356.6 | $280.3 |
| Operating income | $60.6 | $42.2 | $114.5 | $84.0 |
| Net income | $37.9 | $25.7 | $71.7 | $52.3 |
| Diluted EPS | $2.79 | $1.89 | $5.29 | $3.85 |
- Third-quarter net revenue rose 24.6%; year-to-date net revenue increased 28.4%. Total shipments grew 23.5% in the quarter and 26.2% year to date. Core-brand depletions, or distributor sales to retailers, increased approximately 21% and 25%, respectively.
- Core-brand gross margin was 53.0% in the quarter versus 53.3% and 52.1% year to date versus 52.5%. Higher revenue per barrel was partly offset by higher product, packaging and ingredient costs. The filing reports core-brand margin; consolidated gross profit as a share of net revenue was approximately 53.0% in the quarter and 52.0% year to date.
- Cash and equivalents were $57.2 at September 27, 2014, compared with $49.5 at December 28, 2013. Year-to-date operating cash flow was $102.6, compared with $66.9; investing cash outflow was $128.3, including $128.3 of property and equipment purchases. Financing provided $33.4, largely reflecting stock-option exercise proceeds.
- Total debt was approximately $0.6; there were no borrowings on the $150.0 revolving facility, which runs to March 31, 2019, and the company reported covenant compliance. Current assets were $187.7 and current liabilities $122.4. Property, plant and equipment, net, increased to $371.8 from $266.6 at year-end.
Material changes versus the prior comparable period
- Growth was principally shipment- and volume-driven, with gains in Angry Orchard, Samuel Adams and Twisted Tea. Core-brand net revenue per barrel increased 1.0% in the quarter and 1.7% year to date, due mainly to pricing and product/package mix.
- Advertising, promotional and selling expense rose 15.9% in the quarter and 28.4% year to date, reflecting higher media, marketing, sales staffing and freight costs. General and administrative expense was essentially flat in the quarter and rose 6.6% year to date.
- A $1.6 impairment charge was recorded in the third quarter for machinery intended to be replaced in early 2015; the comparable 2013 quarter included a $1.3 impairment of Freetown, Massachusetts land.
- Year-to-date capital spending increased substantially from $73.1 to $128.3. The company made no share repurchases during the 39-week period; on October 9, the board raised the repurchase authorization limit to $350.0. As of October 24, cumulative repurchases were approximately 10.9 million shares for $299.5, leaving $50.5 under the limit.
Guidance, risks and other notable items
- Management maintained 2014 diluted EPS guidance of $6.00–$6.40, while noting that lower operating costs per barrel in the third quarter were expected to be offset by slightly lower-than-planned fourth-quarter volume. It estimated full-year depletion and shipment growth of 20%–24%, gross margin of 51%–53%, national price increases of approximately 2%, and an effective tax rate of approximately 37.5%.
- Preliminary 2015 assumptions were low-teens depletion and shipment growth, price increases of 1%–2%, gross margin of 51%–53%, and an effective tax rate of approximately 38%. Planned advertising, promotional and selling expense increases were $25–$35 million, excluding freight increases; Alchemy & Science brand investment was included in that range. Management cautioned that these brand investments may not generate volume growth and that related 2015 estimates could change significantly.
- Estimated capital expenditures were revised to $150–$160 million for 2014, from $160–$185 million, and projected at $80–$100 million for 2015. Management said expected 2015 capacity could be met by company breweries and existing third-party capacity.
- Non-cancelable purchase commitments totaled $135.6 million at September 27, including $58.6 million for hops, barley and wheat, $29.7 million for equipment and machinery, and $34.7 million for advertising. The filing reports no pending or threatened litigation expected to materially adversely affect financial condition or results. Environmental remediation estimates were accrued; management did not expect additional costs above estimates to have a material adverse effect.
- The company said it expected cash, future operating cash flow and its unused credit line to meet future requirements. It reported no off-balance-sheet arrangements or material ordinary-course changes to contractual obligations. The company was evaluating the impact of the new revenue-recognition standard, scheduled for adoption in fiscal 2017.
Important facts for investors to verify
- Whether shipment and depletion growth, particularly in Angry Orchard and other core brands, continues and translates into sustainable revenue growth.
- Whether input, packaging and freight costs, product mix and increased marketing spending affect gross margins and operating profitability relative to guidance.
- Actual fourth-quarter 2014 results versus EPS, volume, margin and capital-spending guidance, and any updates to preliminary 2015 assumptions.
- Execution and returns on brewery capacity and Alchemy & Science investments, alongside the company’s substantial purchase commitments and capital expenditure program.
- Subsequent use of the expanded share-repurchase authorization and ongoing liquidity, including availability of the revolving credit facility.