Boston Beer Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 25, 2022; comparisons are with the periods ended June 26, 2021. Unaudited results. The company sells alcoholic beverages in the U.S. and selected international markets.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net revenue | $616.2M | $602.8M | $1,046.4M | $1,147.9M |
| Gross profit | $265.8M | $275.7M | $438.7M | $525.3M |
| Gross margin | 43.1% | 45.7% | 41.9% | 45.8% |
| Operating income | $71.4M | $80.1M | $69.2M | $156.7M |
| Net income | $53.3M | $59.2M | $51.4M | $124.8M |
| Diluted EPS | $4.31 | $4.75 | $4.15 | $10.01 |
Q2 shipments were 2.419M barrels, down 1.1%; distributor depletions declined approximately 7%. Net revenue per barrel rose 3.4% to $254.77, primarily from price increases. First-half shipments declined 12.6% to 4.127M barrels, while net revenue per barrel increased 4.4% to $253.54.
For the first half, operating cash flow was $121.5M, capital expenditures were $50.8M, and investing cash outflow was $50.3M. Cash and cash equivalents were $137.8M at June 25, versus $26.9M at December 25, 2021; restricted cash was zero. The company reported no outstanding credit-line borrowings and had $150M available under its revolving facility. Current liabilities were $290.9M and current assets were $449.6M. Lease liabilities were $58.3M in total; the filing reports no outstanding revolving borrowings.
Changes and management commentary
- Q2 net revenue increased 2.2%, but gross profit fell 3.6%, operating income fell 10.9%, and net income fell 9.9% year over year. Higher pricing was partly offset by lower shipments; higher materials costs, returns, and inventory write-offs pressured cost of goods sold.
- First-half net revenue declined 8.8% and net income declined 58.8%. Management attributed the revenue decline mainly to lower shipments. Cost of goods sold per barrel rose, including from lower production volumes at company-owned breweries.
- Advertising, promotional and selling expense declined 4.2% in Q2 and 5.6% year to date, principally reflecting lower media costs. G&A expense rose 17.9% in Q2 and 21.0% year to date, mainly from higher salaries, benefits, and third-party services.
- Management said cash, expected operating cash flow, and the available credit facility should fund future requirements. It was negotiating an extension of the facility, scheduled to expire March 31, 2023, and expected an agreement in the second half of 2022. No specific earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- At current production projections, the company expects about $89M in future third-party production shortfall fees, including $8M for the remainder of 2022 and $26M in 2023. If remaining-term volumes were zero, contractual shortfall fees would total approximately $194M. Separately, first-half contract termination costs were $5.3M, primarily related to terminating a third-party production contract.
- Distributor inventory averaged approximately four weeks, which management viewed as appropriate for most brands, but inventory was low for certain Truly packages. Management expected distributor inventory weeks to remain below 2021 levels for the rest of the year. Truly and several other brands faced volume declines; Twisted Tea and Hard Mountain Dew grew.
- A consolidated securities class action alleges misleading statements or omissions concerning the company’s business and prospects. The company’s motion to dismiss was pending; potential loss could not be estimated.
- Management cited higher materials and freight costs, inventory write-offs, and uncertain advertising returns as operating considerations. It reported no significant change in interest-rate or foreign-currency exposure and no material change in internal controls.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the cash-flow statement reports first-half 2021 operating cash flow of $31.0M, while MD&A states $34.0M.
- Track shipment and depletion trends, particularly Truly, and whether pricing can offset volume declines and cost inflation without further margin pressure.
- Monitor actual third-party production shortfall fees against the $89M estimate, contract commitments, and the impact of the terminated production agreement.
- Confirm the outcome and terms of the credit-facility extension, and the status and potential exposure of the securities litigation.
- Assess cash conversion and working-capital movements, including receivables, inventory, and the timing of income-tax refunds.