Business context and reporting period
The Boston Beer Company, Inc. brews and sells alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and other brands. This unaudited Form 10-Q covers the 13 weeks ended March 26, 2016, compared with the 13 weeks ended March 28, 2015. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue before excise taxes | $202.0 | $212.8 |
| Net revenue | $188.8 | $199.5 |
| Gross profit | $91.5 | $99.6 |
| Operating income | $11.2 | $22.1 |
| Net income | $7.0 | $13.7 |
| Diluted EPS | $0.53 | $1.00 |
| Operating cash flow | $6.3 | $21.2 |
- Consolidated gross margin was approximately 48.5%, versus 49.9%; operating margin was approximately 5.9%, versus 11.1%. Core-brand gross margin was 48.5%, down from 50.0%.
- Total shipments fell 6.2% to 834,000 barrels; core-brand shipments declined 6.3%. Core-brand depletions, or distributor sales to retailers, fell approximately 5%.
- Core-brand net revenue per barrel rose 0.9% to $227.21, while core-brand cost of goods sold per barrel rose to $116.94 from $112.62. Management attributed the cost increase primarily to lower-volume brewery costs and inefficiencies, plus product mix.
- Cash and cash equivalents were $51.1 at March 26, down from $94.2 at year-end 2015. Current assets were $182.5 and current liabilities $101.5. Total debt and capital lease obligations were approximately $0.5; no borrowings were outstanding on the $150.0 revolving facility, available through March 31, 2019.
- Investing cash outflow was $13.0, principally property and equipment purchases. Financing cash outflow was $36.4, including $60.8 of share repurchases, partly offset by $20.3 of stock-option exercise proceeds. Capital expenditures were $13.0 for the quarter.
Material changes versus the prior period
- Net revenue decreased 5.4%, mainly because of lower shipments, partly offset by price increases. Declines in Samuel Adams and Angry Orchard were partly offset by growth in Twisted Tea and Coney Island.
- Operating income fell about 49%, as lower gross profit and higher operating expenses more than offset reduced advertising, promotional and selling expense. General and administrative expense rose 22.1% to $21.0, primarily due to higher stock compensation, compensation and facilities costs.
- Advertising, promotional and selling expense declined 1.7% to $59.2, largely reflecting lower freight expense, but increased as a share of net revenue to 31.4% from 30.2%.
- Operating cash flow declined to $6.3 from $21.2. The periods included income-tax refunds of $12.0 in 2016 and $17.2 in 2015; working-capital movements also affected the comparison.
- The company repurchased 333,646 Class A shares during the quarter. Including purchases through April 15, repurchases totaled approximately 415,000 shares for $75.7. The board raised the program limit to $575.0; $53.2 remained as of April 15.
Outlook, risks and unusual items
- Management lowered its 2016 diluted EPS target to $6.50–$7.30 from $7.60–$8.00. It revised its expected change in depletions and shipments to minus 4% to plus 2%, from previously expected mid-single-digit growth. Year-to-date depletions through April 9 were estimated down approximately 5%.
- Other 2016 targets: gross margin of 51%–53% (previously 52%–54%); national price increases of 1%–2%; advertising, promotional and selling expense increase of $0–$10 (previously $10–$20); capital expenditures of $50–$70 (previously $60–$80); and an effective tax rate of approximately 37%. The fiscal year has 53 weeks.
- Management cited lower volume, planned spending and excess brewery capacity as significant pressures on quarterly results. It plans to adjust costs and pursue efficiencies while investing some savings in brands, sales capabilities and product development, and said it may accept short-term earnings pressure in pursuit of long-term profitable growth.
- Cash, expected operating cash flow and the unused credit facility were expected to fund requirements. Management believed 2016 capacity needs could be met by owned breweries and existing contract capacity; capital-spending and operating targets remain subject to change.
- Non-cancelable purchase commitments totaled $168.0 at quarter-end, including $62.7 for hops, barley and wheat, $40.3 for apples and other ingredients, and $20.7 for advertising. Hops commitments of $47.5 extend through crop year 2020 and include euro-denominated exposure; the company does not hedge currency exposure with derivatives.
- The company received a $12.0 IRS refund relating to 2015 estimated taxes and tax-law changes. It disclosed no material litigation expected to adversely affect its financial condition or results, no material off-balance-sheet arrangements, and no significant change in market-risk exposures. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether shipment and depletion trends stabilize, particularly for Samuel Adams and Angry Orchard, and whether planned pricing offsets volume weakness.
- Whether gross-margin and EPS targets are achievable given lower volume, brewery utilization, product mix, and rising per-barrel costs.
- Whether planned efficiency measures and expense changes are realized without undermining brand investment and sales growth.
- The cash impact of continued share repurchases, capital expenditures and $168.0 of purchase commitments, alongside operating cash generation and available credit.
- How foreign-exchange movements affect contracted euro-denominated hops purchases; the company does not use currency hedges.