Boston Beer Company, Inc. — Q2 2013 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 29, 2013; comparisons are with the periods ended June 30, 2012. The company sells Samuel Adams, Twisted Tea, Angry Orchard and other alcoholic beverages in the U.S. and selected international markets. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | 13 weeks 2013 | 13 weeks 2012 | 26 weeks 2013 | 26 weeks 2012 |
|---|---|---|---|---|
| Revenue, before excise taxes | $194.9 | $159.7 | $341.4 | $282.6 |
| Net revenue | $181.3 | $147.5 | $317.3 | $260.8 |
| Gross profit | $97.1 | $80.4 | $164.9 | $142.2 |
| Operating income | $32.0 | $23.4 | $41.7 | $35.3 |
| Net income | $19.7 | $14.4 | $26.6 | $21.8 |
| Diluted EPS | $1.45 | $1.06 | $1.96 | $1.61 |
- Net revenue rose 23% in Q2 and 22% for the first half, mainly from shipment growth. Q2 total shipments increased 21% to 842,000 barrels; first-half shipments rose 20% to 1.478 million barrels. Core-brand depletions increased approximately 24% and 21%, respectively.
- Q2 core-brand net revenue per barrel increased 2% to $216.23. Core gross margin was 53.6%, versus 54.6% a year earlier. For the first half, core gross margin fell to 52% from 55%, and core gross profit per barrel declined to $112.26 from $115.91, reflecting higher processing and ingredient costs and product/package mix.
- Operating expenses increased: advertising, promotional and selling costs (excluding customer program costs reclassified to revenue) rose 14% in Q2 and 13% for the first half; G&A increased 16% and 21%, respectively. Management attributed the increases mainly to marketing, sales staffing, freight, salaries and benefits, and first-half consulting costs.
- Operating cash flow was $18.0 for the first half, down from $23.3. Investing cash outflow was $45.5, mainly for brewery equipment upgrades and kegs; financing cash outflow was $22.1, principally reflecting share repurchases.
- Cash and equivalents declined to $24.9 at June 29 from $74.5 at December 29, 2012. Capital expenditures were $45.6 in the first half. Total debt and capital lease obligations were approximately $0.8; the $50.0 revolving credit facility had no borrowings and was fully available through March 2015. The company reported compliance with its credit covenants.
Material changes and outlook
- The company began reporting customer program and incentive costs as reductions of revenue rather than advertising, promotional and selling expense: $3.0 in Q2 and $5.2 for the first half of 2013. Comparable 2012 costs were included in selling expenses, so line-item comparisons are affected; management’s per-barrel and combined-cost comparisons incorporate this change.
- Management raised 2013 diluted EPS guidance to $5.10–$5.40 from $4.70–$5.10, citing expected shipment and depletion growth of approximately 17%–22%. It cautioned actual results could differ significantly.
- Full-year gross margin is expected at 52%–54%; planned price increases of approximately 1% are expected to offset only part of cost pressures. Management expects advertising, promotional and selling expense to increase $20–$26, excluding freight increases; this includes $4–$6 of investment in existing Alchemy & Science brands.
- Expected 2013 effective tax rate is approximately 37%. Capital expenditure estimates increased to $100–$140 for 2013 and $100–$130 for 2014, primarily for brewery investment and kegs. Management cited accelerated growth and capacity bottlenecks; it expected existing company-owned and contracted brewing capacity to cover the remainder of 2013.
Risks, commitments and other notable items
- Outstanding non-cancelable purchase commitments totaled $93.6, including hops and malt, equipment and machinery, bottles, advertising and other items. Hops commitments were $22.4, largely denominated in euros; barley, wheat and malt commitments were $13.3.
- Environmental remediation and related acquisition costs were estimated at $3.2, with corresponding recorded liabilities and assets. Management stated costs above the current estimate were not expected to materially affect financial position or results.
- The IRS began examining the company’s 2010 and 2011 federal income tax returns in May 2013; the examination was ongoing. A state tax audit was also ongoing.
- The company’s previously reported appeal concerning claims tied to the 2009 change in ownership of the High Falls brewery was denied. The filing reports no pending or threatened litigation expected to materially harm financial condition or results.
- Management noted that advertising investments may not generate sales growth, competition and input costs may pressure margins, and forward-looking estimates are subject to uncertainty. No significant change in interest-rate or foreign-currency exposure was reported; the company did not use derivatives for hedging or trading.
Most important facts for investors to verify
- Whether shipment and depletion growth, including the 17%–22% full-year outlook, is sustained and translates into profitable growth.
- Whether cost inflation and product mix keep gross margins within the 52%–54% outlook despite planned price increases of about 1%.
- Whether the increased brewery capital program can be executed on schedule and within the raised spending ranges, and how it affects cash and capacity.
- Cash conversion and liquidity: first-half operating cash flow declined while capital spending and repurchases were substantial; confirm future operating cash flow and continued availability of the credit facility.
- Progress and potential outcomes of the IRS examination, environmental remediation, and the company’s purchase commitments, particularly commodity and foreign-currency exposure.