Boston Beer Company, Inc. — Q1 2023 Form 10-Q
Business context and period: The company sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Truly, Twisted Tea, Angry Orchard, Dogfish Head and Hard Mountain Dew. This unaudited report covers the 13 weeks ended April 1, 2023; comparisons are to the 13 weeks ended March 26, 2022. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $435.2 | $457.3 | Down 4.8% |
| Net revenue | $410.0 | $430.1 | Down 4.7% |
| Barrels sold | 1.579 million | 1.705 million | Down 7.4% |
| Gross profit | $155.7 | $173.0 | Down 10.0% |
| Gross margin | 38.0% | 40.2% | Down 2.2 percentage points |
| Operating loss | $(13.9) | $(2.2) | Loss widened |
| Net loss | $(9.0) | $(2.0) | Loss widened |
| Diluted loss per share | $(0.73) | $(0.16) | — |
| Cash used in operating activities | $(17.8) | $(41.0) | Use of cash narrowed |
| Capital expenditures, net of disposals | $(17.1) | $(23.7) | Use of cash narrowed |
- Net revenue per barrel rose 3.0% to $259.73, primarily from price increases, partly offset by higher estimated returns. Cost of goods sold per barrel increased 6.8% to $161.12.
- Cash and cash equivalents were $122.6 million at quarter-end, down from $180.6 million at December 31, 2022. The company reported no outstanding borrowings on its $150 million revolving credit facility, which expires December 16, 2027; it said the full facility was available and it was in covenant compliance.
- Total liabilities were $351.2 million, including $96.2 million of deferred income taxes and operating lease liabilities. The filing reports no outstanding line-of-credit debt.
- Cash used in financing activities was $23.1 million, including $21.1 million of share repurchases. Stock repurchases and capital spending, along with operating cash use, contributed to the decline in cash.
Material changes and management commentary
- Shipment volume fell 7.4%; management said depletions declined 6%. Declines in Truly, Angry Orchard, Samuel Adams and Dogfish Head were partly offset by growth in Twisted Tea and Hard Mountain Dew. Distributor inventory was estimated at about five weeks on hand and management considered it appropriate for each brand.
- Net revenue declined by $20.1 million, mainly from $32.6 million of lower shipment volume and $4.1 million of higher estimated returns, partly offset by $17.5 million from price increases.
- Gross margin contracted as cost of goods sold per barrel increased. Management cited $8.1 million of inflation-related costs, $7.6 million of higher inventory obsolescence costs and $4.5 million of contract settlement costs; lower freight costs partly offset these items.
- Advertising, promotional and selling expenses fell 4.0% to $125.4 million, largely because distributor freight costs declined by $12.6 million. This was partly offset by $7.4 million of increased brand investment. General and administrative expenses rose 10.1%, primarily due to consulting costs.
- The prior-year quarter included $4.8 million of contract termination costs; none were recorded in Q1 2023. Impairment of brewery assets was $0.5 million versus $0.04 million.
- Management expects quarter-end cash, projected operating cash flow and the available credit facility to fund future cash requirements. The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
Risks, commitments and contingencies
- At current production projections, the company expects approximately $41 million of shortfall fees under third-party production agreements, including about $9 million for the remainder of 2023, $15 million in 2024 and $11 million in 2025. The filing states that contractual fees could total approximately $124 million over the remaining contract terms if volumes were zero. The company recorded $0.7 million of shortfall fees in the quarter.
- Non-cancelable contractual commitments totaled $267.2 million, primarily for ingredients and packaging, brand support, hops and malt, and equipment. Most are due in fiscal 2023; the remainder extend no later than fiscal 2026.
- A securities class action was dismissed, but the plaintiff appealed; the company says a potential loss range cannot currently be estimated. Ardagh Metal Packaging alleges the company failed to meet contractual minimum can-volume purchases in 2021 and 2022. The company disputes the claim, and a potential loss range cannot currently be estimated.
- The company noted that advertising and promotional investments may not generate sales growth. It also identified forward-looking statements as subject to risks and uncertainties, with additional risk factors referenced in its 2022 Form 10-K.
Important facts for investors to verify
- Whether shipment and depletion trends improve, particularly for Truly and other declining brands, and whether distributor inventory remains appropriate.
- Whether price increases and operating actions can offset inflation, inventory obsolescence, contract settlement costs and production shortfall fees—and support a recovery in gross margin.
- The timing and cash impact of the expected $41 million in production shortfall fees, and any changes to the higher potential contractual exposure.
- Progress and potential outcomes of the Ardagh supplier litigation and the securities litigation appeal.
- Cash generation, use of the revolving credit facility, capital spending and continued share repurchases amid operating losses.