The Boston Beer Company, Inc. — FY 2013 Form 10-K
Business and reporting period. Boston Beer is a U.S. craft brewer selling Samuel Adams, Twisted Tea, Angry Orchard and Alchemy & Science brands, primarily through independent distributors. The fiscal year ended December 28, 2013 and comprised 52 weeks; the comparable 2012 year also comprised 52 weeks.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue, before excise taxes | $793.7 million | $628.6 million |
| Net revenue | $739.1 million | $580.2 million |
| Gross profit / margin | $384.9 million / 52.1% | $315.2 million / 54.3% |
| Operating income / margin | $113.1 million / 15.3% | $95.6 million / 16.4% |
| Net income | $70.4 million | $59.5 million |
| Diluted EPS | $5.18 | $4.39 |
| Operating cash flow | $100.0 million | $95.3 million |
| Capital expenditures | $100.7 million | $66.0 million |
- Shipments were 3.416 million barrels, up 24.4%; core-brand shipments rose 24.8%. Distributor depletions of core products increased approximately 23%.
- Net revenue per core-brand barrel rose 2.2% to $216.94, reflecting pricing and product/package mix, partly offset by higher customer programs and incentives.
- Core-brand gross margin fell to 52.1% from 54.4%. Cost of goods sold per barrel increased to $103.91 from $96.87 amid higher ingredient costs, mix effects and operating inefficiencies associated with faster-than-expected growth.
- Advertising, promotional and selling expense increased 22.8% to $207.9 million; general and administrative expense increased 24.2% to $62.3 million.
- Cash and cash equivalents were $49.5 million, down from $74.5 million. Working capital was $59.9 million. Total assets were $444.1 million and stockholders’ equity was $302.1 million.
- Debt and capital lease obligations totaled approximately $0.6 million at year-end; the company had no borrowings under its revolving credit line. In January 2014, it expanded the facility from $50 million to $150 million and extended maturity to March 31, 2019.
Fourth-quarter snapshot
For the 13 weeks ended December 28, 2013, net revenue was $205.4 million versus $153.0 million in Q4 2012; gross profit was $104.6 million versus $79.8 million; operating income was $29.1 million versus $27.0 million; and net income was $18.1 million versus $16.9 million. Barrels sold were 943,000 versus 733,000. These figures imply strong year-over-year growth, while Q4 gross margin was approximately 51.0%, below approximately 52.1% a year earlier.
Outlook, commentary and risks
- For 2014, management targeted diluted EPS of $6.00–$6.40, shipment and depletion growth of 16%–20%, and gross margin of 51%–53%. It planned national price increases of about 2% and $34–$42 million of additional advertising, promotional and selling expense.
- Planned 2014 capital expenditures were $160–$220 million, mainly for brewery capacity, capabilities and additional kegs. Management expected owned and contracted brewery capacity to cover 2014 needs, but noted the estimates could change.
- Management reported product shortages and service issues in the second half of 2013 as the supply chain struggled with higher-than-planned volume, contributing to operational and freight costs. It had expanded packaging and tank capacity to address constraints.
- The Freshest Beer Program covered over 65% of volume at year-end and had reduced participating distributors’ inventories by about two weeks. The associated inventory reductions lowered shipments by an estimated 212,000 case equivalents in 2013; forecasting, execution and out-of-stock risks remain.
- Key exposures include intense competition, brewery capacity and execution, distributor relationships, dependence on suppliers and agricultural inputs, packaging availability and cost, and unhedged euro and sterling exposure. A hypothetical 10% adverse currency move could reduce future cash flows by about $4.6 million.
- Non-cancelable purchase commitments were reported as $165.2 million in the commitments note; the MD&A contractual-obligations table totals $174.6 million including $9.4 million of operating leases. No material off-balance-sheet arrangements or material adverse pending litigation were reported. Environmental remediation costs accrued were approximately $0.7 million.
- Angry Orchard became the largest-selling U.S. cider, according to the company. Alchemy & Science brands remained less than 1% of net revenue. The company recorded a $1.6 million long-lived-asset impairment, primarily relating to Freetown, Massachusetts land.
Most important facts for investors to verify
- Whether volume growth and 2014 targets were achievable given reported shortages, near-capacity operations and the planned capital program.
- Whether gross margins stabilize after 2013 input-cost increases, mix effects, freight inefficiencies and promotional spending.
- How Freshest Beer Program inventory reductions affect shipments, retail availability, revenue timing and working capital.
- Supplier, crop and foreign-exchange exposures, including the company’s unhedged foreign-currency commitments and the concentration of key packaging suppliers.
- The basis and timing of planned capital spending, credit-line availability, and cash needs alongside the stock-repurchase program.
- Governance implications of Class B voting control: Chairman C. James Koch held all outstanding Class B shares and could elect a majority of directors and decide most matters requiring stockholder approval.