Boston Beer Company, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the 13 and 26 weeks ended June 29, 2019, compared with the periods ended June 30, 2018. Boston Beer produces and sells alcoholic beverages in the United States and selected international markets. Dogfish Head results are not included: the acquisition closed July 3, 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue before excise taxes | $338.6 million | $289.6 million | $606.2 million | $491.4 million |
| Net revenue | $318.4 million (+16.6%) | $273.1 million | $570.1 million (+23.0%) | $463.6 million |
| Barrels shipped | 1.374 million (+16.8%) | 1.177 million | 2.451 million (+23.2%) | 1.989 million |
| Gross profit | $159.0 million | $142.0 million | $283.5 million | $238.1 million |
| Gross margin | 49.9% | 52.0% | 49.7% | 51.4% |
| Operating income | $37.9 million | $31.1 million | $67.4 million | $40.3 million |
| Net income | $27.9 million | $23.5 million | $51.6 million | $32.8 million |
| Diluted EPS | $2.36 | $1.98 | $4.38 | $2.76 |
| Operating cash flow | Not separately presented for the quarter | $55.5 million | $53.7 million |
- Q2 net revenue growth was primarily volume-driven. Truly Hard Seltzer and Twisted Tea shipments increased, while Samuel Adams and Angry Orchard shipments declined. First-half depletions (distributor sales to retailers) grew about 15%, below the 23.2% shipment increase.
- Gross margin contracted 2.1 percentage points in Q2 and 1.7 points for the first half. Management cited higher processing costs from increased third-party brewing and temporary labor to support variety-pack volumes, partly offset by brewery cost savings. Net revenue per barrel also declined slightly due to package mix, partly offset by price increases.
- Operating income increased 22.1% in Q2 and 67.2% for the first half. Advertising, promotional and selling expense rose in dollars but declined as a share of net revenue, as shipments grew faster than those expenses. First-half net income also reflects a higher tax provision; the filing attributes lower adjusted effective tax rates primarily to reduced nondeductible officer compensation.
Financial position and liquidity
- At June 29, 2019, cash and cash equivalents were $3.0 million, down from $108.4 million at December 29, 2018. Current assets were $178.8 million and current liabilities $188.3 million.
- The company had $37.5 million outstanding on its $150 million revolving credit facility, leaving $112.5 million available. The borrowing rate was 2.95%; the facility expires March 31, 2023. The company reported compliance with its financial covenants.
- First-half operating cash flow of $55.5 million was offset by $44.6 million of property, plant and equipment purchases and $158.4 million paid into escrow for the Dogfish Head transaction. Investing cash outflow was $203.0 million; financing cash inflow was $42.1 million, including net line-of-credit borrowing.
- Operating lease liabilities totaled $41.6 million; capital lease liabilities totaled $2.9 million. The company also reported $161.9 million in non-cancelable contract obligations, including ingredient, advertising, and equipment commitments.
Material changes, outlook and risks
- Dogfish Head acquisition: The July 3 closing consideration was $336.0 million—$173.0 million cash and 429,292 restricted Class A shares valued at $163.0 million at closing. A portion of the shares is escrowed, with release primarily tied to founder Samuel Calagione’s continued employment. The company estimated approximately $8 million of transaction and other non-recurring costs, $1.5 million of which had been expensed by June 29.
- 2019 outlook: Including Dogfish Head from July 3, management raised expected full-year shipments and depletions growth to 17%–22%; excluding Dogfish Head, the estimate was 13%–18%. Dogfish Head was expected to add 3%–4% to second-half annual shipments and depletions growth and $50–$60 million in net revenue, at a 50% gross margin. Excluding transaction and other non-recurring costs, management expected the acquisition to be neutral to slightly accretive to 2019 diluted EPS.
- Management forecast full-year gross margin of 50%–51%, advertising, promotional and selling expense growth of $35–$45 million, capital expenditures of $120–$140 million, and non-GAAP diluted EPS of $8.30–$9.30. It targeted national price increases of 1%–3% and a non-GAAP effective tax rate of about 27%. These are estimates, not guarantees; the non-GAAP EPS and tax-rate outlook excludes the potentially significant, unpredictable impact of ASU 2016-09.
- Shipments exceeded depletions in the first half, increasing distributor inventory; management estimated about three weeks on hand at June 29 and expected levels to remain between two and four weeks for the rest of the year. It considered inventory appropriate to support forecast summer growth, but noted that volume and promotional investments may not produce expected sales.
- Other risks and unusual items include cost pressure from external brewing and labor, contracted ingredient and advertising commitments, and foreign-currency exposure on some hop purchases; the company does not hedge with currency contracts. It expects a roughly $1.7 million expense when terminating its union pension plan in 2020. Management reported no litigation expected to materially affect financial condition or results, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether shipment growth converts into sustained depletions growth without excessive distributor inventory.
- Whether gross margins recover from the first-half decline as production costs, labor needs, and product mix evolve.
- The final purchase-price allocation, goodwill, acquired liabilities, integration costs, and earnings contribution from Dogfish Head.
- Whether the company’s very low cash balance, available credit, operating cash generation, and planned capital expenditures support liquidity needs.
- Actual 2019 results against management’s growth, margin, spending, capital expenditure, and non-GAAP EPS outlook, including the excluded ASU 2016-09 effects.