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, Angry Orchard, HardCore Cider, House of Shandy and Angel City. This unaudited Form 10-Q covers the 13 weeks and 26 weeks ended June 30, 2012, compared with the periods ended June 25, 2011. Financial amounts below are in millions unless otherwise noted.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net revenue | $147.5 | $134.0 | $260.8 | $236.1 |
| Gross profit | $80.4 | $76.1 | $142.2 | $128.4 |
| Operating income | $23.4 | $44.9 | $35.3 | $51.5 |
| Net income | $14.4 | $28.0 | $21.8 | $32.0 |
| Diluted EPS | $1.06 | $2.01 | $1.61 | $2.29 |
| Operating cash flow | — | — | $23.3 | $42.4 |
- Net revenue increased 10.1% in Q2 and 10.4% year to date. Shipment volume rose 6.9% in Q2 and 7.1% year to date; core-brand net selling price per barrel rose about 3.1% in both comparisons.
- Consolidated gross margin was approximately 54.5% in Q2 and year to date. Management reported core-brand gross margin of 54.6% for both the quarter and first half.
- At June 30, cash and cash equivalents were $41.1, down from $49.5 at year-end 2011. Current assets were $134.1 and current liabilities $73.0.
- The company had $0.6 of note payable ($0.1 current), no borrowings on its $50.0 revolving credit facility, and the full facility remained available through March 31, 2015. The term note is secured by approximately $0.6 of restricted cash.
- First-half investing cash use was $33.9, principally brewery equipment purchases; capital expenditures were $31.8. Financing activities provided $2.3, including $7.6 of Class A share repurchases. Total assets were $305.6 and stockholders’ equity $210.6 at June 30.
Material changes versus prior period
- Net income declined despite revenue and volume growth. The comparison is significantly affected by the $20.5 settlement payment recorded as an operating-expense offset in Q2 2011 related to the 2008 bottle recall; no comparable settlement proceeds were recorded in 2012.
- Q2 core-brand gross margin fell to 54.6% from 56.9%, as higher barley and ingredient costs, unfavorable product/package mix and quarter-specific operating costs outweighed price increases. First-half core margin was nearly unchanged at 54.6% versus 54.5%.
- Advertising, promotional and selling expense increased 8.9% in Q2 and 8.6% year to date, reflecting advertising, sales staffing and freight costs. General and administrative expense also rose, partly due to Alchemy & Science startup costs.
- Operating cash flow fell to $23.3 from $42.4 in the first half, while investing cash use rose to $33.9 from $6.0, principally reflecting brewery investments. The company acquired substantially all assets of Angel City Brewing for a preliminary $1.9 purchase price in January 2012.
Outlook, commentary and risks
- Management raised its 2012 depletion-growth outlook to 8%–12% from 6%–9%; estimated first-half depletions growth was about 9%. It maintained diluted EPS guidance of $3.80–$4.20.
- Management expects full-year gross margin of 54%–56%, an effective tax rate of about 38%, and capital expenditures of $55–$75, raised from $40–$60. Planned 2012 increases in advertising, promotional and selling expense are $11–$15, excluding freight increases. Alchemy & Science startup costs are estimated at $3–$5.
- Management cited cost pressures and product/package mix as offsets to pricing and potentially stronger demand; it also noted that advertising investment may not generate sales growth. It expected company-owned and contracted brewing capacity to cover 2012 requirements.
- Purchase commitments included $29.4 for hops, $13.3 for barley and malt, $21.8 minimum glass-bottle purchases, $8.0 for advertising contracts and $19.6 of other non-cancelable commitments. Additional barley commitments of $5.1 were entered into after quarter-end.
- The filing describes environmental remediation arrangements, including estimated costs and related grant-funded assets; management said additional costs above currently estimated amounts were not expected to materially adversely affect financial position or results. The IRS examination of 2007–2009 returns and a state tax audit were ongoing. A $1.3 arbitration award related to a former brewing-services provider was not recorded because collection was uncertain.
- Management stated that cash, future operating cash flow and the unused credit line should be sufficient for future cash requirements. Forward-looking results remain subject to the risks described in the filing and the company’s 2011 Form 10-K.
Important facts for investors to verify
- Whether depletion and shipment growth persists, particularly given declines in some Samuel Adams styles and lower wholesaler inventory under the Freshest Beer Program.
- Whether ingredient, operating and freight costs pressure margins beyond management’s 54%–56% full-year outlook.
- Execution and returns on the substantially higher brewery and keg investment plan, and whether the $55–$75 capital spending estimate changes.
- Progress toward the $3.80–$4.20 diluted EPS guidance, including planned marketing and Alchemy & Science spending.
- Developments in tax audits, environmental remediation costs, and collection prospects for the unrecorded arbitration award.
- Liquidity and capital allocation, including use of the credit facility, note repayment, and remaining share-repurchase authorization.