Business context and reporting period
The Boston Beer Company, Inc. brews and sells alcoholic beverages, including Samuel Adams, Twisted Tea, Angry Orchard, Truly Spiked & Sparkling and other brands. This unaudited Form 10-Q covers the 13 and 26 weeks ended June 25, 2016, compared with periods ended June 27, 2015. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | 13 weeks 2016 | 13 weeks 2015 | 26 weeks 2016 | 26 weeks 2015 |
|---|---|---|---|---|
| Revenue, before excise taxes | $261.2 | $268.7 | $463.2 | $481.6 |
| Net revenue | $244.8 | $252.2 | $433.6 | $451.7 |
| Gross profit | $126.9 | $136.2 | $218.4 | $235.8 |
| Gross margin | 51.8% | 54.0% | 50.4% | 52.2% |
| Operating income | $41.8 | $46.8 | $53.0 | $69.0 |
| Net income | $26.6 | $29.9 | $33.7 | $43.7 |
| Diluted earnings per share | $2.06 | $2.18 | $2.58 | $3.18 |
- Q2 shipment volume fell 4% to 1.08 million barrels; first-half volume fell 5% to 1.914 million barrels. Depletions declined approximately 5% in both periods.
- Net revenue per barrel rose approximately 1% in both periods, mainly due to price increases (and product/package mix in the first half). Gross profit per barrel fell to $117.45 in Q2 and $114.11 in the first half, as higher brewery costs, lower volume and efficiency, and product mix outweighed pricing.
- Advertising, promotional and selling expense declined 11% in Q2 and 7% in the first half, reflecting lower media spend and freight costs. General and administrative expense rose 21% in Q2 and 22% in the first half, principally due to higher stock compensation, salaries and benefits, and facilities costs.
- First-half operating cash flow was $48.3, versus $78.4 a year earlier; capital spending was $26.0, versus $38.9. Financing used $89.0, mainly reflecting increased share repurchases.
Financial position and liquidity
At June 25, 2016, cash and cash equivalents were $27.6, down from $94.2 at December 26, 2015. Total assets were $590.6 and current liabilities were $111.1. Debt and capital lease obligations totaled approximately $0.5, including $0.06 current. The company had no borrowings under its $150.0 revolving credit facility, which expires March 31, 2019; the facility was fully available and the company reported covenant compliance.
First-half capital expenditures were $26.0, primarily for brewery equipment and upgrades. The company repurchased 727,627 Class A shares during the first half for $124.7. Through July 15, it had repurchased approximately 743,000 shares for $127.7; $12.2 remained under the $586.0 authorized repurchase limit.
Guidance, outlook and risks
- Management reduced and narrowed 2016 diluted EPS guidance to $6.40–$7.00 from $6.50–$7.30. Year-to-date depletions through July 9 were estimated down approximately 4%.
- Management forecast 2016 depletions and shipments ranging from a 4% decline to no change, national price increases of 1%–2%, gross margin of 50%–52%, and advertising, promotional and selling expense ranging from a $5 decrease to a $5 increase. The estimated effective tax rate was approximately 36.3%.
- Capital expenditure guidance was narrowed to $60–$70, primarily for brewery capacity, product innovation, efficiency and cost reductions. Management expected company-owned breweries and existing third-party capacity to cover 2016 requirements.
- Key operating risks include continuing declines in depletions for Samuel Adams, Angry Orchard and Traveler, and higher unit brewery costs associated with lower volume and efficiencies. Management cautioned that actual results could differ significantly from guidance.
- Non-cancelable contractual commitments totaled $190.4, including $90.2 for hops, barley and wheat; $35.2 for apples and other ingredients; and $20.0 for equipment and machinery. Hops commitments extended through crop year 2022 and included foreign currencies; the company did not hedge currency exposure with forward contracts.
- The company reported no pending or threatened litigation expected to have a material adverse effect, no material off-balance-sheet arrangements, and no significant change in market-risk exposures. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether shipment and depletion trends stabilize, particularly for Samuel Adams, Angry Orchard and Traveler, and whether growth brands offset declines.
- Whether pricing, brewery efficiencies and product mix can offset lower volumes and rising unit costs, supporting the revised 50%–52% gross-margin outlook.
- Whether the company’s cash generation and available credit remain sufficient alongside planned capital expenditures and share repurchases.
- Whether the $6.40–$7.00 EPS guidance and other 2016 assumptions are achieved; management noted estimates may vary significantly.
- Exposure to significant supply commitments, including contracted hops and other inputs, and the effects of unhedged foreign-currency movements on purchases.