Boston Beer Company, Inc. — Q2 2014 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 28, 2014; comparisons are to the corresponding periods ended June 29, 2013. Financial amounts below are in millions unless stated otherwise. The company brews and sells Samuel Adams, Twisted Tea, Angry Orchard and other alcoholic beverages.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net revenue | $231.6 | $181.3 | $415.5 | $317.3 |
| Gross profit | $123.1 | $97.1 | $213.6 | $164.9 |
| Operating income | $40.5 | $32.0 | $53.9 | $41.7 |
| Net income | $25.4 | $19.7 | $33.7 | $26.6 |
| Diluted EPS | $1.88 | $1.45 | $2.49 | $1.96 |
- Q2 net revenue rose 28% and first-half net revenue rose 31%. Total shipment volume increased 25% in Q2 and 28% in the first half; management attributed growth primarily to core brands. Core-brand depletions grew approximately 23% in Q2 and 28% in the first half.
- Consolidated gross margin was approximately 53.1% in Q2 versus 53.6% a year earlier, and 51.4% in the first half versus 52.0%. Core-brand gross profit per barrel increased, but higher packaging and ingredient costs and product mix pressured margins.
- Advertising, promotional and selling expense rose 31% to $65.9 million in Q2 and 36% to $127.2 million in the first half, reflecting greater advertising, sales staffing and commissions, local marketing and freight. General and administrative expense increased 12% in Q2 and 10% year to date.
- Operating cash flow was $38.3 million in the first half, compared with $18.0 million in 2013. Capital expenditures were $88.5 million, versus $45.6 million; investing cash outflow was $88.4 million.
- Cash declined to $31.3 million at June 28 from $49.5 million at year-end 2013. Current assets were $174.4 million and current liabilities $124.8 million, a current ratio of about 1.4x.
- Total debt and capital lease obligations were approximately $0.6 million. The company had no borrowings under its $150 million revolving credit facility, which expires March 31, 2019, and reported covenant compliance.
Material changes and financial position
- Property, plant and equipment, net, increased to $347.6 million from $266.6 million at year-end, in line with significant brewery and equipment investment. First-half capital spending exceeded operating cash flow.
- Cash from financing was $31.8 million, compared with $22.1 million used in the prior-year first half, mainly due to higher stock-option exercise proceeds and fewer share repurchases. The company reported no repurchases under its public stock repurchase program in the period; 1,063 shares repurchased were unvested employee investment-plan shares.
- Non-cancelable purchase commitments totaled $130.1 million, including commitments for hops, malt, equipment, ingredients, advertising and glass. Hops commitments were $29.4 million and barley, wheat and malt commitments were $16.8 million.
Outlook, commentary and risks
- Management raised its 2014 expected shipment and depletion growth range to 20%–24%, from 16%–20%; year-to-date depletions through July 19 were estimated up approximately 27%.
- Management maintained its 2014 diluted EPS target of $6.00–$6.40, expected a full-year effective tax rate of approximately 38%, and targeted national price increases of about 2%. Full-year gross margin was forecast at 51%–53%.
- Planned 2014 increases in advertising, promotional and selling expense were raised to $37–$45 million, excluding freight increases. Estimated capital expenditures were narrowed to $160–$185 million. Management cautioned actual results and spending could vary significantly.
- Management noted that planned investment in Alchemy & Science brands may exceed those brands’ 2014 volume contribution; expected related advertising and promotional investment was $3–$5 million, with capital investment of $7–$9 million.
- Risks and uncertainties include rising ingredient and packaging costs, product mix, promotional effectiveness, growth-related investment and the company’s ability to meet demand. The company also disclosed foreign-currency-denominated hops commitments, but reported no significant change in interest-rate or foreign-currency exposure since year-end and no use of derivatives.
- The company reported no material pending litigation. Estimated environmental remediation and related costs were recorded with offsetting assets; management said additional costs above current estimates were not expected to have a material adverse effect. The IRS began examining the 2012 federal corporate tax returns in April 2014, and one state audit was ongoing.
- The company was evaluating the impact of the new revenue-recognition standard, which it expected to adopt in fiscal 2017. Management stated interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether shipment and depletion growth sustains the raised 20%–24% 2014 outlook and supports the $6.00–$6.40 diluted EPS target.
- Whether gross margins remain within the 51%–53% forecast as ingredient, packaging, mix and freight costs evolve.
- Whether planned capital expenditures of $160–$185 million and increased brand spending can be funded while maintaining adequate cash and liquidity.
- How the $130.1 million of purchase commitments, including commodity and equipment obligations, convert into cash requirements.
- Any material developments from the IRS and state tax examinations, environmental remediation, or the evaluation of the new revenue-recognition standard.