Boston Beer Company, Inc. — FY2012 Form 10-K
Business context and reporting period. The company produces and sells Samuel Adams beers, Twisted Tea flavored malt beverages, Angry Orchard hard cider, and newer Alchemy & Science brands through independent distributors. The filing covers the 52 weeks ended December 29, 2012; FY2011 had 53 weeks. Although the request references Q4, this is an annual filing and the quarterly figures below are unaudited.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue before excise taxes | $628.6 million | $558.3 million |
| Net revenue | $580.2 million | $513.0 million |
| Gross profit / gross margin | $315.2 million / 54.3% | $284.6 million / 55.5% |
| Operating income | $95.6 million | $103.7 million |
| Net income | $59.5 million | $66.1 million |
| Diluted EPS | $4.39 | $4.81 |
| Operating cash flow | $95.3 million | $72.8 million |
| Capital spending on property and equipment | $66.0 million | $19.6 million |
- Net revenue increased 13.1%; total shipment volume increased 10.6% to 2.746 million barrels. Company-reported depletions rose about 12% for the comparable 52-week period.
- Cash was $74.5 million at year-end, up from $49.5 million. Working capital was $73.4 million, versus $58.7 million.
- No borrowings were outstanding on the $50 million revolving credit facility, which runs to March 2015. A separate note payable had a $628,000 balance. Total long-term obligations in selected financial data were $25.5 million.
- Stockholders’ equity was $245.1 million. The company repurchased approximately 165,000 Class A shares for about $18.0 million in FY2012; about $18.5 million remained under the $300 million program limit as of February 15, 2013.
Fourth-quarter results
For the 13 weeks ended December 29, 2012, barrels sold were 733,000, net revenue was $153.0 million, gross profit was $79.8 million, operating income was $27.0 million, net income was $16.9 million, and diluted EPS was $1.25. The comparable FY2011 quarter had 14 weeks and reported 673,000 barrels, $142.1 million net revenue, $80.1 million gross profit, $25.7 million operating income, $17.8 million net income, and $1.33 diluted EPS. The unequal quarter lengths limit direct comparison.
Material changes and management commentary
- FY2012 net revenue growth reflected higher core-brand shipments and pricing. Core-brand net selling price per barrel increased 2.5% to $212.37.
- Core-brand gross margin declined to 54.4% from 55.5%, as higher barley, hops, other ingredient, and customer-program costs outpaced pricing benefits. Overall gross margin was 54.3%.
- Operating income and net income fell year over year despite sales growth. FY2011 included a one-time $20.5 million settlement payment from the former glass supplier related to the 2008 bottle recall, recorded as an offset to operating expenses. FY2012 had no corresponding proceeds.
- FY2012 advertising, promotional and selling expense increased 7.7% to $169.3 million; general and administrative expense increased 15.4% to $50.2 million. Certain customer incentive costs were reclassified from selling expense to contra-revenue during 2012, affecting comparability; the fourth quarter included $3.5 million of such reclassified costs.
- Cash from operations was $95.3 million. Investing activities used $67.3 million, primarily reflecting brewery investment; financing activities used $3.0 million, including share repurchases.
Outlook, risks and contingencies
- Management targeted FY2013 diluted EPS of $4.70–$5.10 and planned depletions and shipments growth of approximately 10%–15%. Depletions for the six weeks ended February 9, 2013 were estimated to be up about 15% year over year.
- Management expected FY2013 gross margin of 53%–55%, planned pricing increases of approximately 1%–2%, and anticipated advertising, promotional and selling expense increases of $18–$26 million. Expected 2013 capital spending was $70–$85 million; later annual investment was estimated at $30–$50 million. These are estimates, not guarantees.
- Key risks include intense competition from craft brewers, imports and large brewers; production capacity and brewery interruption risk; distributor dependence; and execution and forecasting challenges in the Freshest Beer Program. That program had lowered participating wholesaler inventories by about two weeks and reduced FY2012 shipments by an estimated 241,000 case equivalents, lowering reported diluted EPS by approximately $0.08.
- Ingredient and packaging exposure includes limited supplies of specialty apples, hops and malt, rising input costs, and single-source supply for core-brand glass and labels. Apple shortages affected cider shipment timing in 2012. Foreign-currency commitments for hops and other inputs are not hedged; management estimated that a hypothetical 10% adverse currency move could affect future cash flows by about $4.0 million.
- Non-cancelable contractual obligations totaled approximately $116.3 million, including hops, equipment, glass, advertising, leases and other commitments. Environmental remediation liabilities were recorded for two Cincinnati-area properties; management said additional costs above the estimated $3.2 million would not be expected to materially affect results or financial position.
- A Rochester Brewery contract dispute remained on appeal. The company reported an arbitration award of approximately $1.3 million, but said collection was uncertain. It stated that it had no pending or threatened litigation expected to materially affect financial condition or results.
- Class B shares, held by Chairman C. James Koch, carry voting control, including the ability to elect a majority of directors. Class A shares have limited voting rights. The company does not anticipate paying dividends in the foreseeable future.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and financial reporting controls.
Important facts for investors to verify
- Whether FY2013 shipment and depletion growth targets can be achieved without further gross-margin pressure.
- How much of the FY2012 earnings decline reflects the absence of FY2011’s recall settlement versus underlying operating performance.
- Whether planned brewery capacity and capital spending are sufficient to support growth, and whether the Freshest Beer Program causes further shipment timing or execution issues.
- Whether apple, hops, malt, glass and other supply constraints or unhedged foreign-currency exposure increase costs or limit product availability.
- The scope and cash timing of contractual commitments, remediation spending, and any recovery of the Rochester Brewery arbitration award.
- The implications of Class B voting control and continued share repurchases for public Class A shareholders.