Boston Beer Company, Inc. — FY 2011 Form 10-K
Business context and period. The company brews and sells Samuel Adams beers, Twisted Tea flavored malt beverages and hard cider brands, primarily in the United States through about 400 independent distributors. This filing covers the fiscal year ended December 31, 2011, a 53-week year; comparatives are the 52-week year ended December 25, 2010. The company sold approximately 2.5 million barrels of core products.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue, before excise taxes | $558.3 million | $505.9 million |
| Net revenue | $513.0 million | $463.8 million |
| Gross profit / margin | $284.6 million / 55.5% | $256.3 million / 55.3% |
| Operating income | $103.7 million | $81.2 million |
| Net income | $66.1 million | $50.1 million |
| Diluted EPS | $4.81 | $3.52 |
| Operating cash flow | $72.8 million | $67.8 million |
| Capital expenditures | $19.6 million | $13.6 million |
| Cash and working capital at year-end | $49.5 million / $58.7 million | $49.0 million / $39.8 million |
Shipments rose 9.3% to 2.484 million barrels; core-brand shipments rose 9.4%, while distributor depletions increased approximately 7.3%. Net selling price per core-brand barrel increased 1.2% to $207.26. Advertising, promotional and selling expenses rose 15.9% to $157.3 million, including higher sales-force, marketing and freight costs.
Reported 2011 results included a $20.5 million payment from the former glass-bottle supplier relating to the 2008 recall, recorded as an offset to operating expenses, and a $2.1 million benefit from a state tax audit settlement. Management cited comparable 2011 diluted EPS of $3.73 excluding the recall settlement benefit of $0.92 per share and the state tax settlement benefit of $0.16 per share.
There were no borrowings under the $50 million revolving credit facility at year-end; it was scheduled to expire in March 2015, and the company reported covenant compliance. Selected financial data lists $20.7 million of long-term obligations, but the filing text does not provide a clear breakdown of that amount as debt. Cash was nearly unchanged year over year despite operating cash generation, primarily because of $62.8 million of share repurchases and $19.6 million of capital spending.
Material changes versus prior period
- Net revenue increased 10.6%; management attributed the gain mainly to higher core-brand shipments and modest pricing gains, partly offset by stale-beer returns.
- Net income increased to $66.1 million from $50.1 million. Results benefited materially from the recall settlement; reported operating income also included the settlement as a reduction of expenses.
- Gross margin edged up to 55.5% from 55.3%. Higher selling prices were partly offset by higher cost per barrel, unfavorable package mix and increased inventory obsolescence.
- Cash from operations increased to $72.8 million from $67.8 million. Inventory grew to $34.1 million from $26.6 million, contributing to working-capital investment.
- Freshest Beer Program participation expanded to more than 55 wholesalers, representing about half of volume. Lower participating-wholesaler inventories reduced 2011 shipments by an estimated additional 133,000 case equivalents.
Outlook, risks and unusual items
- 2012 outlook: Targeted diluted EPS of $3.80–$4.20; planned depletion growth of approximately 6%–9%; and expected revenue-per-barrel growth of about 3%. Management projected gross margin of 53%–55% and an effective tax rate of approximately 38%. These are targets, not guarantees.
- Management expected barley cost pressures to add more than $8 million in 2012 and said planned price increases would not fully offset cost pressures and product-mix changes. Advertising, promotional and selling investment was expected to increase $8–$12 million; Alchemy & Science startup costs were estimated at $3–$5 million.
- Planned 2012 capital expenditures were estimated at $40–$60 million, versus $19.6 million in 2011, largely for brewery investment and kegs. Management believed owned and contracted capacity could meet 2012 needs, while noting owned breweries were near capacity in peak months.
- Key risks include intense competition, dependence on distributors, production capacity and third-party brewing availability, rising ingredient and packaging costs, crop and foreign-exchange exposure, and the execution demands of expanded brands and distribution. Barley and hop commitments were $9.2 million and $33.6 million, respectively; hops are not currency-hedged.
- Environmental remediation costs of approximately $2.6 million were accrued with a matching grant receivable; the company would bear costs above the estimate. A $1.3 million arbitration award against High Falls was not recorded because collection was uncertain. The company said no pending or threatened litigation was expected to materially harm its financial condition or results.
- After year-end, the wholly owned Alchemy & Science subsidiary acquired substantially all Angel City Brewing assets for approximately $1.8 million and entered related service and lease arrangements totaling about $2.1 million through 2017.
Important facts for investors to verify
- Reconcile reported 2011 EPS of $4.81 with management’s $3.73 comparable figure and confirm the effects of the recall and state tax settlements.
- Track 2012 depletion growth, pricing, gross margin and ingredient-cost realization against management’s targets, especially barley costs.
- Assess whether higher capital spending and the Freshest Beer Program improve capacity, freshness and retail availability without disrupting shipments or cash flow.
- Monitor working-capital and inventory growth, cash generation, share repurchases and use of the undrawn credit facility.
- Verify execution and costs for the national Twisted Tea and Angry Orchard rollouts, Alchemy & Science, and the Angel City acquisition.
- Review exposure to non-hedged foreign-currency hop commitments, concentrated suppliers, distributor relationships and the uncertain High Falls award.