Business context and reporting period
The Boston Beer Company, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. The year comprised 53 weeks, versus 52 weeks in 2015; fourth-quarter 2016 comprised 14 weeks, versus 13 weeks in the prior-year quarter. The company sells Samuel Adams, Twisted Tea, Angry Orchard, Truly Spiked & Sparkling and A&S Brewing brands, primarily through independent distributors. It sold approximately 4.0 million barrels in 2016, and brewed and packaged over 95% of volume at company-owned breweries.
Financial and operating metrics
Dollar amounts below are in millions except per-barrel data and per-share amounts.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue before excise taxes | $969.0 | $1,024.0 | -5.4% |
| Net revenue | $906.4 | $959.9 | -5.6% |
| Barrels sold | 4.019 million | 4.256 million | -5.6% |
| Gross profit / margin | $459.7 / 50.7% | $501.6 / 52.3% | Margin down 1.6 percentage points |
| Operating income / margin | $137.7 / 15.2% | $156.2 / 16.3% | Income down 11.9% |
| Net income | $87.3 | $98.4 | -11.2% |
| Diluted EPS | $6.79 | $7.25 | -6.3% |
| Net revenue per barrel | $225.55 | $225.55 | Unchanged |
Fourth-quarter results: net revenue was $219.4 million versus $215.1 million; gross profit was $107.7 million versus $108.8 million; operating income was $34.3 million versus $26.3 million; net income was $22.2 million versus $16.1 million; diluted EPS was $1.75 versus $1.21. The quarter-length difference limits direct comparison.
Cash from operations was $154.2 million, down from $168.7 million. Capital expenditures were $49.9 million; investing activities used $46.0 million, including $3.9 million of land-sale proceeds. Financing activities used $111.3 million, primarily reflecting share repurchases. Cash and equivalents ended the year at $91.0 million, compared with $94.2 million. Working capital was $99.7 million, versus $112.4 million.
At year-end, the company had no borrowings under its $150 million revolving credit facility, which matures in March 2019. Balance-sheet current and long-term debt and capital lease obligations totaled approximately $0.5 million. Total liabilities were $176.7 million. Non-cancelable contractual obligations were $173.4 million, including $71.1 million for hops, barley and wheat.
Material changes versus the prior comparable period
- Distributor depletions fell approximately 5% and shipments declined 5.6%. Declines in Samuel Adams, Angry Orchard, Traveler and Coney Island were partly offset by growth in Twisted Tea and Truly Spiked & Sparkling.
- Gross margin contracted as cost of goods sold per barrel rose $3.48, to $111.17, reflecting unfavorable fixed-cost absorption and product mix, partly offset by brewery cost savings.
- Advertising, promotional and selling expense declined 10.8% to $244.2 million, mainly due to lower freight costs and reduced media and point-of-sale spending. General and administrative expense increased 9.1% to $78.0 million, primarily from salary, benefits and facilities costs.
- Cash declined modestly despite positive operating cash flow, as share repurchases and capital investment consumed cash. The company repurchased approximately 945,000 shares for $161.7 million during 2016.
Outlook, management commentary and risks
Management targeted 2017 diluted EPS of $4.20–$6.20, depletions and shipments ranging from a 7% decline to 1% growth, price increases of 1%–2%, and gross margin of 51%–52%. It planned to increase advertising, promotional and selling expense by $20–$30 million and estimated capital expenditures of $40–$60 million. These targets are uncertain; 2017 has 52 weeks. Depletions for the six weeks ended February 11, 2017 were estimated to be down approximately 15% from comparable weeks.
Management cited a highly competitive craft-beer market, recent sales declines, distributor and production execution, and the need to invest in brands. Key risks include pressure from larger brewers and expanding craft competitors; demand, forecasting and inventory volatility under the Freshest Beer Program; reliance on distributors and concentrated suppliers; agricultural supply, packaging and foreign-currency cost exposure; and possible production interruptions at company-owned breweries. The company does not hedge its foreign-currency purchase exposure; a hypothetical 10% adverse currency movement was estimated to affect future cash flows by approximately $4.0 million.
CEO Martin Roper announced plans to retire in 2018. The fourth quarter included a $3.6 million reversal of previously recorded stock-based compensation related to his planned retirement. The company also reported a $1.0 million gain on sale of land and $0.7 million of asset impairment charges for 2016. No pending or threatened litigation was identified as expected to materially affect its financial condition or results. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the 2017 depletion and shipment outlook is achieved, particularly given the reported early-2017 depletion decline.
- Whether volume stabilization, planned brand spending and pricing support margins after the 2016 gross-margin contraction.
- Whether distributor inventory reductions and supply-chain changes affect shipment timing, product availability or reported revenue.
- Execution of CEO succession and the effect of the 2016 compensation reversal and subsequent equity awards on future earnings.
- Capacity, supplier and foreign-exchange risks, and the funding implications of $173.4 million in contractual commitments and planned capital spending.
- Cash allocation and liquidity, including continued share repurchases; the filing states that approximately $154.7 million remained under the board’s repurchase limit as of the filing period.