The Boston Beer Company, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The company sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Truly, Twisted Tea, Angry Orchard and Dogfish Head. This unaudited filing covers the 13 and 39 weeks ended September 26, 2020; comparisons are with the periods ended September 28, 2019. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net revenue | $492.8 | $378.5 | $1,275.5 | $948.5 |
| Gross profit | $240.6 | $187.8 | $598.2 | $471.4 |
| Gross margin | 48.8% | 49.6% | 46.9% | 49.7% |
| Operating income | $101.8 | $59.8 | $202.1 | $127.2 |
| Operating margin | 20.7% | 15.8% | 15.8% | 13.4% |
| Net income | $80.8 | $44.7 | $159.1 | $96.3 |
| Diluted EPS | $6.51 | $3.65 | $12.90 | $8.07 |
- Volume and revenue: Q3 shipments rose 30.5% to 2.080 million barrels; year-to-date shipments rose 34.1% to 5.425 million barrels. Management attributed growth mainly to Truly Hard Seltzer and Twisted Tea, with Dogfish Head contributing to year-to-date growth. Q3 depletions rose about 36%; year-to-date depletions rose about 40% (38% excluding Dogfish Head).
- Cash flow: Operating cash flow was $208.9, versus $142.7 in the prior-year period. Capital spending was $100.3; investing cash outflow was $99.9, compared with $232.1 in 2019, which included the Dogfish Head acquisition. Cash increased by $120.5 to $157.1.
- Liquidity and obligations: Current assets were $400.0 and current liabilities $231.9 at quarter-end. The $150.0 revolving facility was undrawn and available; the company reported covenant compliance. It reported no material funded debt balance, but lease liabilities totaled $73.4, including operating and finance leases.
Material changes versus prior period
- Q3 net revenue grew 30.2% and net income 80.6%; year-to-date net revenue grew 34.5% and net income 65.3%.
- Margins diverged: Q3 gross margin declined 0.8 percentage points, while operating margin increased 4.9 points. Year-to-date gross margin declined 2.8 points, while operating margin increased 2.4 points.
- Cost of goods sold per barrel rose $1.63 in Q3 and $6.89 year to date, reflecting higher third-party brewing costs and, year to date, COVID-related production costs. Q3 net revenue per barrel declined 0.2%; year-to-date it increased 0.3%.
- Year-to-date advertising, promotional and selling expense rose $43.9, while its share of net revenue fell to 24.0% from 27.7%, as shipments grew faster than the expense base.
Outlook, commentary and risks
- 2020 outlook: Management raised estimated depletion and shipment growth to 37%–42% (including 1%–2% from Dogfish Head), narrowed expected gross margin to 46%–47%, and reduced planned increases in advertising, promotional and selling expense to $55–$65 from $70–$80. Non-GAAP diluted EPS guidance, excluding ASU 2016-09 impacts, increased to $14.00–$15.00. Estimated capital expenditures were lowered to $160–$190. These are estimates, not guarantees.
- Preliminary 2021 outlook: Depletion and shipment growth of 35%–45%; national price increases of 1%–2%; gross margin of 46%–48%; advertising, promotional and selling expense increase of $130–$150; and capital expenditures of $300–$400. The company said detailed guidance would follow with full-year 2020 results; no 2021 EPS target was provided.
- COVID-19: The company recorded $14.2 of year-to-date pre-tax impacts: $3.4 of reduced revenue for estimated keg returns and $10.8 of write-downs and increased costs. Reduced on-premise keg demand, brewery safety measures, lower owned-brewery productivity and greater reliance on third-party production affected operations and margins. Management expected elevated health and safety costs to continue, while the duration and overall impact remained uncertain.
- Capacity and supply: Supply constraints included canning and variety-pack capacity and can and bottle availability. About 65% of volume was brewed at company-owned facilities; reliance on City Brewing rose to 33% of production year to date. Disruptions at company or third-party breweries, suppliers or logistics providers could limit the ability to meet demand.
- Commitments and unusual items: Contractual obligations were $279.6, mostly for 2020 and 2021. Existing third-party production agreements could generate $60.9 of shortfall fees if remaining contracted volume were zero; management expected to meet minimums. A new post-quarter agreement included $9.6 of upfront capital improvements and potential shortfall fees of $10.3 if volume were zero. A defined-benefit plan termination resulted in a $1.5 Q3 expense; a further approximately $1.1 expense was expected in Q4.
- The company reported no litigation expected to have a material adverse effect and no material change to previously reported risk factors other than COVID-19 and its ability to supply rapidly growing demand.
Important facts for investors to verify
- Whether shipment and depletion growth can be sustained and translated into profitable sales, particularly given supply and packaging constraints and the increased use of third-party breweries.
- Whether gross margins recover toward management’s targets despite higher production costs, COVID-related expenses and unfavorable product or package mix.
- Whether the 2020 and preliminary 2021 growth, earnings, expense and capital-spending assumptions are achieved; the filing cautions that actual results may vary.
- How COVID-19 developments affect on-premise demand, production, supply chains and the company’s operating costs.
- Whether production partners’ minimum-volume commitments are met and whether any disclosed or new contractual shortfall fees become probable.
- The $14.2 year-to-date COVID-19 impact, pension-termination costs and non-GAAP EPS guidance’s exclusion of potentially significant, variable stock-option tax effects.