The Boston Beer Company, Inc. — Q2 2018 Form 10-Q
Reporting period: The 13-week quarter ended June 30, 2018; comparisons are to the 13 weeks ended July 1, 2017. The filing also reports year-to-date results for the 26 weeks ended June 30, 2018. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | 26 weeks 2018 | 26 weeks 2017 |
|---|---|---|---|---|
| Net revenue | $273.1 | $247.9 | $463.6 | $409.6 |
| Gross profit / margin | $142.0 / 52.0% | $134.0 / 54.1% | $238.1 / 51.4% | $210.4 / 51.4% |
| Operating income | $31.1 | $45.3 | $40.3 | $49.3 |
| Net income | $23.5 | $29.1 | $32.8 | $34.8 |
| Diluted EPS | $1.98 | $2.35 | $2.76 | $2.79 |
- Q2 shipments rose 9.0% to 1.177 million barrels; year-to-date shipments increased 11.4% to 1.989 million barrels. Management attributed growth chiefly to Truly Spiked & Sparkling, Twisted Tea, and Angry Orchard; Samuel Adams shipments declined. Distributor depletions increased about 12% in Q2 and 11% year to date.
- Net revenue per barrel increased 1.0% in Q2 to $232.09 and 1.6% year to date to $233.02. Q2 cost of goods sold per barrel increased to $111.44 from $105.55, contributing to the lower quarterly gross margin. Higher third-party brewing and packaging costs were cited; company brewery savings partly offset them.
- Q2 advertising, promotional and selling expense rose 27.5% to $86.5 million, reaching 31.7% of net revenue; year-to-date expense rose 26.7% to $154.0 million, or 33.2% of net revenue. Management cited planned brand investments, salaries and benefits, and higher freight expense. G&A also increased.
- At June 30, cash and cash equivalents were $76.2 million, versus $65.6 million at December 30, 2017. Current assets were $212.0 million and current liabilities $131.5 million. Total liabilities were $175.8 million; total stockholders’ equity was $442.7 million.
- Year-to-date operating cash flow was $53.7 million, down from $61.0 million; capital expenditures were $25.5 million, compared with $16.7 million. Cash used in financing was $17.8 million, including $39.7 million of share repurchases and $21.5 million of option-exercise proceeds.
- The company had no borrowings outstanding under its $150 million revolving credit facility, extended to March 31, 2023, and reported covenant compliance. The filing does not clearly quantify any other debt balance.
Material changes and notable items
- Despite double-digit year-to-date revenue growth, operating income declined 18.3% and net income declined 5.7%. For Q2, operating income fell 31.4% and net income fell 19.2%, as operating costs grew faster than revenue.
- Lower income tax rates, primarily following the Tax Cuts and Jobs Act, supported results: the effective tax rate excluding stock-option accounting effects was 28.0% year to date, versus 37.2% in 2017. The company also reported $2.8 million of year-to-date federal excise-tax reductions under the Act.
- Revenue-standard adoption resulted in a $1.0 million after-tax cumulative adjustment to retained earnings and earlier recognition of certain promotional discounts; management expected the ongoing effect to be immaterial.
- The company repurchased approximately 222,000 Class A shares for about $50.5 million during the first half and through July 20. At July 20, $128.1 million remained under the board’s $931.0 million repurchase expenditure limit.
- Total non-cancelable contractual obligations were $171.9 million at June 30, including advertising, ingredient purchases, leases, and equipment. The company entered a $12.8 million, 10-year lease for a Boston retail location during Q2.
Outlook, risks, and contingencies
- Management raised its 2018 estimate for depletions and shipments growth to 7%–12%, from 0%–6%; year-to-date depletions through July 21 were estimated up about 12%. National price increases were targeted at 0%–2%.
- Expected 2018 gross margin was revised down to 51%–53% from 52%–54%. Planned advertising, promotional and selling expense increases were $15–$25 million, excluding freight changes. Non-GAAP diluted EPS guidance was $6.30–$7.30 and the non-GAAP effective tax-rate estimate was about 28%; both exclude ASU 2016-09 effects. The EPS outlook was not reconciled to GAAP because the excluded impact was uncertain.
- Estimated 2018 capital expenditures increased to $65–$75 million from $55–$65 million, mainly for breweries and taprooms. Management expected owned breweries and contracted third-party capacity to cover 2018 needs, but noted estimates may differ from actual spending.
- Risks highlighted include whether greater advertising investment translates into sales, higher freight and production costs, promotional allowance estimates, and business risks described in the company’s 2017 Form 10-K. The company reported no pending or threatened litigation expected to materially adversely affect its financial condition or results. The IRS was examining the 2015 federal tax return, and two states were auditing the company.
- Management said cash, expected operating cash flow, and available credit should fund future requirements. It also noted distributor inventory was lower than planned at quarter-end due to stronger demand. The Chief Marketing Officer’s planned departure was expected July 31, 2018.
Important facts for investors to verify
- Whether shipment and depletion growth persists, particularly for Truly, Twisted Tea, and Angry Orchard, and whether Samuel Adams declines continue.
- Whether the revised margin outlook accounts for third-party brewing, packaging, freight, and planned marketing costs.
- Actual capital expenditure levels, cash generation, and the pace and price of further share repurchases.
- The eventual effect of tax legislation and stock-option tax benefits on reported GAAP earnings versus non-GAAP guidance.
- Developments in the IRS and state tax audits, contractual commitments, and the planned lease-accounting adoption.