Boston Beer Company, Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 28, 2019; comparisons are to the corresponding 2018 periods. Financial statement amounts below are in millions of dollars unless stated otherwise. Dogfish Head results are included from its July 3, 2019 acquisition date, limiting comparability.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First 39 weeks 2019 | First 39 weeks 2018 |
|---|---|---|---|---|
| Revenue before excise taxes | $402.7 | $326.9 | $1,008.9 | $818.3 |
| Net revenue | $378.5 | $306.9 | $948.5 | $770.4 |
| Gross profit | $187.8 | $157.2 | $471.4 | $395.3 |
| Gross margin | 49.6% | 51.2% | 49.7% | 51.3% |
| Operating income | $59.8 | $46.7 | $127.2 | $87.0 |
| Net income | $44.7 | $38.0 | $96.3 | $70.9 |
| Diluted EPS | $3.65 | $3.21 | $8.07 | $5.96 |
- Q3 shipments rose 19.1% to 1.594 million barrels; net revenue increased 23.3%. Net revenue per barrel rose 3.6% to $237.46. Management attributed volume growth mainly to Truly Hard Seltzer, Twisted Tea and Dogfish Head, partly offset by declines in Samuel Adams and Angry Orchard.
- For the first 39 weeks, shipments increased 21.5% to 4.045 million barrels, while net revenue per barrel rose 1.3% to $234.51.
- Operating cash flow was $142.7 for the first 39 weeks, versus $108.1 in 2018. Investing cash use was $232.1, including $165.5 for Dogfish Head, net of cash acquired, and $66.8 of capital spending. Financing provided $8.2.
- Cash declined to $27.1 at September 28 from $108.4 at December 29, 2018. Current assets were $209.4 and current liabilities $166.5. No line-of-credit borrowings were outstanding; the $150 million revolver was fully available through March 31, 2023, and the company reported covenant compliance.
- Total liabilities were $297.2, including operating lease liabilities of $43.8 and capital lease liabilities of $2.7. The filing reports no outstanding borrowings under the revolving facility at period-end.
Material changes and notable items
- Dogfish Head was acquired July 3 for estimated purchase consideration of $317.7, comprising cash and issued shares, subject to purchase-accounting adjustments. The acquisition added $108.8 of goodwill and $100.6 of trade names and customer relationship intangibles. Preliminary valuations remain subject to change. Dogfish Head contributed $27.7 of Q3 revenue and $3.4 of net income.
- Gross margin fell 1.6 percentage points in Q3 and 1.6 points year to date. Management cited higher third-party processing costs and temporary labor for increased variety-pack production; pricing and brewery cost-saving initiatives partly offset these pressures.
- Q3 general and administrative expense rose 38.2%, including Dogfish Head costs and $3.6 of transaction-related fees. Year-to-date transaction-related fees were $5.6; the company estimated total transaction and other non-recurring costs of approximately $9.1.
- Property, plant and equipment increased to $521.3 from $389.8 at year-end. The company reported $211.2 of non-cancelable contract obligations, including advertising, equipment and ingredient commitments.
Outlook, risks and contingencies
- 2019 outlook: Estimated depletion and shipment growth, including Dogfish Head from July 3, was raised/narrowed to 19%–22%; excluding Dogfish Head, 15%–18%. National price increases targeted at 1%–3%; gross margin expected at 50%–51%; planned advertising, promotional and selling expense increase of $40–$50, excluding freight changes. Non-GAAP diluted EPS guidance was $8.70–$9.30 and the estimated Non-GAAP tax rate approximately 27%. These measures exclude the potentially significant, unpredictable effect of stock-based tax accounting (ASU 2016-09).
- Preliminary 2020 assumptions: Shipment and depletion growth in the high teens to low twenties; price increases of 1%–3%; gross margin of 49%–51%; advertising, promotional and selling expense increase of $65–$75, excluding freight; and capital spending of $95–$115. Further detailed guidance was expected with full-year 2019 results.
- Estimated 2019 capital expenditures were reduced to $100–$110 from the prior $120–$140 estimate. Management said existing owned breweries and contracted third-party capacity were expected to cover 2019–2020 requirements.
- Management cautioned that increased brand investment may not generate sales growth, and actual results may differ materially from outlook. Acquisition risks include integration disruption, loss of key employees or business relationships, failure to realize expected growth or synergies, unanticipated liabilities, and impairment of acquired goodwill or intangibles.
- The company disclosed no pending or threatened litigation expected to materially adversely affect financial condition or results. It had $0.8 of unrecognized tax benefits and was subject to one state tax audit. It expects approximately $1.7 of expense from terminating a union pension plan in 2020.
Important facts for investors to verify
- Whether shipment and depletion growth and 2019 non-GAAP EPS guidance were achieved, and how much growth was organic versus contributed by Dogfish Head.
- Whether gross-margin pressure from production costs and temporary labor continued, and whether the stated 2020 margin range proved attainable.
- How Dogfish Head integration, final purchase-price allocation, transaction costs and performance compared with management’s assumptions; monitor acquired goodwill and indefinite-lived brand assets for impairment.
- Whether operating cash flow and available revolver capacity remained adequate amid lower cash, capital spending and contractual commitments.
- Whether planned increases in marketing investment translated into volume growth and whether the company’s capital expenditure estimates changed.