Business context and reporting period
The Boston Beer Company, Inc. sells alcoholic beverages in the United States and selected international markets, including Samuel Adams, Twisted Tea, HardCore and Angry Orchard. This unaudited Form 10-Q covers the quarter and nine months ended September 24, 2011; comparisons are with periods ended September 25, 2010. Amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $147.0 | $136.0 | $404.4 | $379.6 |
| Net revenue, after excise taxes | $134.8 | $124.5 | $370.9 | $348.1 |
| Gross profit | $76.0 | $69.8 | $204.5 | $190.0 |
| Operating income | $26.4 | $26.6 | $77.9 | $62.3 |
| Net income | $16.3 | $15.4 | $48.3 | $38.0 |
| Diluted EPS | $1.19 | $1.09 | $3.48 | $2.65 |
- Q3 net revenue increased 8.1%; shipments rose 6.8% to 658,000 barrels. Core-brand depletions (wholesaler sales to retailers) increased about 11%.
- For the first nine months, net revenue increased 6.6% and shipments rose 6.2% to 1.811 million barrels. Core-brand depletions and shipments through October were estimated up about 8% and 7%, respectively.
- Core-brand gross margin was 56.4% in Q3 versus 56.1%; for the first nine months it was 55.1% versus 54.6%. Q3 cost per core barrel increased modestly; year-to-date cost per barrel declined, primarily on lower ingredient costs.
- Advertising, promotional and selling expense rose 13.6% in Q3 and 16.7% year to date, reflecting marketing, sales staffing and freight costs. General and administrative expense also increased.
- Nine-month operating income included $20.5 million in settlement proceeds from the former glass-bottle supplier. The proceeds were recorded as an offset to operating expenses; they are a significant nonrecurring contributor to reported year-to-date earnings.
Cash, liquidity and capital
- Operating cash flow was $57.9 million for the first nine months, compared with $53.5 million a year earlier. Capital expenditures were $12.3 million, versus $10.0 million.
- Cash was $48.1 million at September 24, 2011, down from $49.0 million at December 25, 2010. Financing used $46.5 million, including $50.9 million of Class A share repurchases.
- The company had no debt outstanding and had full availability under its $50 million revolving credit facility, which expires March 31, 2015; it reported compliance with covenants. Total current assets were $128.2 million and current liabilities $82.6 million.
- Through October 28, the company reported cumulative repurchases of about 10.5 million shares for $249.5 million, with $25.5 million remaining under the $275 million authorization.
Material changes and outlook
- Management raised 2011 diluted EPS guidance to $3.60–$3.90, excluding the $0.92-per-share benefit of the recall settlement. The forecast includes an estimated $0.10–$0.20-per-share negative impact from shipments affected by the Freshest Beer Program and a $0.13–$0.18-per-share estimated benefit from the state tax settlement.
- For 2011, management expected depletion growth of 7.5%–9%, revenue per barrel growth of 1%–1.5%, gross margins of 54%–56%, and a tax rate of about 36%. Shipment growth was projected at 7%–8.5% if the Freshest Beer Program covered 50% of volume. Estimated capital expenditures were $21–$27 million.
- For 2012, management forecast mid- to high-single-digit depletion growth, revenue per barrel growth of 2.5%–3.5%, gross margins of 53%–55%, and an effective tax rate of about 38%. It anticipated $5–$10 million of additional advertising, promotional and selling expense and $25–$35 million of capital expenditures.
- Management cited barley cost pressure and a challenging competitive pricing environment for 2012. Price increases may not fully offset cost increases; marketing investments are not guaranteed to generate sales growth. The company expected owned breweries and existing contracted capacity to meet 2012 capacity needs.
Risks, contingencies and unusual items
- Freshest Beer Program implementation reduced participating wholesalers’ inventories; management noted lower-than-otherwise-expected inventories among program participants and forecast shipment effects. Increased stale-beer returns also partially offset year-to-date pricing gains.
- At September 24, the company had commitments of $40.6 million for hops, $12.1 million for barley, $14.3 million for advertising contracts, and $5.2 million of other non-cancelable purchases. Hops contracts extend through crop year 2015 and are mostly euro-denominated.
- A Massachusetts tax examination settlement reached October 24 was estimated to benefit fourth-quarter tax expense by $1.7–$2.3 million. IRS and other state examinations were also noted. Unrecognized tax benefits were about $7.2 million, with $4.2 million accrued for related interest and penalties.
- A $1.3 million arbitration award relating to a former brewing-services provider was not recorded because collection was uncertain. The company reported no pending or threatened litigation expected to have a material adverse effect. It also cautioned that future product quality issues could result in recalls.
- Management stated that cash, future operating cash flow and the unused credit line should be sufficient for future cash requirements. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Separate recurring operating performance from the $20.5 million recall-related settlement when assessing nine-month earnings and cash flow.
- Track depletion growth, shipment growth, wholesaler inventories and the actual earnings impact of the Freshest Beer Program.
- Compare realized selling prices and gross margins with barley, packaging, brewery-processing and freight cost trends.
- Monitor share repurchases, cash balances, capital spending and use of the revolving credit facility.
- Confirm the realized tax benefit from the Massachusetts settlement and any developments in the IRS and other state audits.