Boston Beer Company, Inc. — Q2 2017 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 1, 2017; comparisons are to the periods ended June 25, 2016. Financial amounts are in U.S. dollars; statement amounts below are in millions unless noted.
Business context and financial performance
The company brews and sells beer, cider and other alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard and Truly. In the second quarter, higher revenue per barrel and lower production costs supported improved margins and earnings despite weaker performance in several brands. First-half shipments and net revenue declined.
| Metric | 13 weeks ended July 1, 2017 | Change year over year | 26 weeks ended July 1, 2017 | Change year over year |
|---|---|---|---|---|
| Net revenue | $247.9 million | +1.3% | $409.6 million | -5.5% |
| Barrels shipped | 1.079 million | -0.1% | 1.786 million | -6.7% |
| Gross profit | $134.0 million | +5.6% | $210.4 million | -3.7% |
| Gross margin | 54.1% | 51.8% prior year | 51.4% | 50.4% prior year |
| Operating income | $45.3 million | +8.4% | $49.3 million | -7.0% |
| Net income | $29.1 million | +9.4% | $34.8 million | +3.5% |
| Diluted EPS | $2.35 | $2.06 prior year | $2.79 | $2.58 prior year |
Second-quarter depletions, or distributor sales to retailers, fell approximately 3%; first-half depletions fell approximately 7%. Samuel Adams, Coney Island and Angry Orchard were the principal sources of declines, partly offset by growth in Twisted Tea and Truly Spiked & Sparkling. Net revenue per barrel rose 1.3% in Q2 and 1.2% year to date, mainly from pricing and package mix. Cost of goods sold per barrel declined to $105.55 in Q2 and $111.58 for the first half, reflecting lower brewery processing costs and cost-saving initiatives.
Cash flow, liquidity and capital
- First-half operating cash flow was $61.0 million, compared with $51.3 million in 2016. Capital expenditures were $16.7 million, versus $25.9 million.
- Cash declined to $71.7 million from $91.0 million at year-end 2016, principally reflecting share repurchases and capital spending. First-half financing cash outflow was $63.7 million, including $78.2 million of Class A share repurchases.
- The company reported no borrowings under its $150 million revolving credit facility, which expires March 31, 2019; it said the facility was fully available and it was in compliance with covenants. A separate note payable was $0.34 million.
- Total liabilities were $179.8 million and stockholders’ equity was $421.7 million at July 1, 2017. The filing states cash, expected operating cash flow and the unused credit line should be sufficient for future cash requirements.
- At July 21, 2017, cumulative repurchases were approximately 13.1 million shares for $695.9 million, with $85.1 million remaining under the board’s $781 million expenditure limit. Repurchases during the 26 weeks and the following period through July 21 totaled approximately 608,000 shares for $88.2 million.
Material changes, outlook and risks
- Q2 operating income and net income increased despite nearly flat shipment volume. Gross margin expanded, while advertising, promotional and selling expense rose 7.2% to $67.8 million; management cited higher media spending and employee costs. General and administrative expense fell 11.0% to $19.4 million.
- For the first half, the effective tax rate fell to 29.7% from 36.1%, primarily due to a $3.7 million tax benefit from adopting ASU 2016-09. The adoption also makes reported first-half earnings less directly comparable with the prior period.
- A $1.5 million impairment charge reflected brewery equipment write-downs at the Pennsylvania and Cincinnati breweries.
- Management estimated year-to-date depletions through the 29 weeks ended July 22 were down approximately 7%. Its 2017 estimates were: depletions and shipments change of -7% to +1%; revenue per barrel growth of 1% to 2%; gross margin of 51% to 52%; and non-GAAP diluted EPS of $5.00 to $6.20, excluding ASU 2016-09. The EPS range was narrowed from $4.20 to $6.20. Management cautioned actual results could vary significantly and did not provide a forward reconciliation of non-GAAP measures.
- Management planned to increase full-year advertising, promotional and selling expense by $20 million to $30 million and estimated 2017 capital expenditures of $35 million to $45 million. It cautioned increased brand investment may not produce volume growth.
- The company had $127.3 million in non-cancelable contractual obligations, including $58.7 million for hops, barley and wheat, and $14.3 million for operating leases. Hops commitments extend through crop year 2022 and include foreign-currency-denominated contracts; the company does not hedge currency exposure. It brews and packages more than 90% of volume at company-owned breweries.
- The filing reported no litigation expected to have a material adverse effect, no off-balance-sheet arrangements, and no significant change in interest-rate or foreign-currency market exposures. Management identified no material change in risk factors from its 2016 Form 10-K. Advertising effectiveness, declining depletions, input supply and costs, and execution of cost savings and brand investment remain relevant uncertainties.
Important facts for investors to verify
- Whether the first-half shipment and depletion declines stabilize, and whether growth in Twisted Tea and Truly can offset weakness in Samuel Adams, Coney Island and Angry Orchard.
- Whether Q2 margin improvement from pricing, mix and cost initiatives is sustainable, particularly as advertising investment rises.
- How much reported 2017 earnings and the tax rate reflect the one-time or variable effects of ASU 2016-09; compare GAAP results with the company’s non-GAAP outlook.
- Cash use from continued repurchases, planned capital spending and contractual commitments, and remaining capacity under the repurchase authorization and credit facility.
- Whether the $1.5 million brewery-equipment impairment signals further utilization or asset-value concerns.