Boston Beer Company, Inc. — Q3 2023 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 30, 2023, compared with periods ended September 24, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Boston Beer sells alcoholic beverages under brands including Samuel Adams, Twisted Tea, Truly, Angry Orchard and Dogfish Head.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net revenue | $601.6 | $596.5 | $1,614.9 | $1,642.8 |
| Gross profit | $274.6 | $257.7 | $704.5 | $696.5 |
| Gross margin | 45.7% | 43.2% | 43.6% | 42.4% |
| Operating income | $61.5 | $38.4 | $125.9 | $107.6 |
| Operating margin | 10.2% | 6.4% | 7.8% | 6.5% |
| Net income | $45.3 | $27.3 | $94.4 | $78.7 |
| Diluted EPS | $3.70 | $2.21 | $7.67 | $6.36 |
- Sales and volume: Q3 net revenue rose 0.9%, while shipments fell 2.5% to 2.286 million barrels. Year to date, net revenue declined 1.7% and shipments fell 4.6% to 6.175 million barrels. Depletions declined 6% in both periods. Price increases partly offset lower volume; year-to-date product mix also weighed on revenue.
- Costs and margins: Q3 cost of goods sold per barrel decreased 1.0%, helped by lower inventory obsolescence and contract renegotiations/recipe optimization, partly offset by inflation. Year-to-date cost per barrel increased 0.8%, as inflation and a contract settlement more than offset those savings. Selling and advertising costs declined in dollars, mainly due to lower freight, but increased per barrel; G&A rose 13% in Q3 and 12.9% year to date.
- Cash flow: Operating cash flow was $232.4 million year to date, versus $225.0 million in the prior-year period. Capital expenditures were $48.8 million, versus $70.3 million. Cash and cash equivalents increased to $310.8 million from $180.6 million at December 31, 2022. The company repurchased $62.5 million of Class A shares for cash during the period.
- Balance sheet and funding: Current assets were $579.4 million and current liabilities $264.8 million at September 30, 2023. The company had no revolving-credit borrowings and had the full $150 million facility available, maturing December 16, 2027; it reported compliance with its covenants. Operating lease liabilities totaled $47.5 million. Management expects cash, future operating cash flow and available credit to fund future requirements.
Material changes and unusual items
- Q3 included a $16.4 million non-cash impairment of Dogfish Head and Coney Island trademarks, compared with a $27.1 million Dogfish Head impairment in Q3 2022. The company cited negative brand trends, competition and a slowing craft-beer sector; Dogfish Head’s canned cocktails partly offset forecast reductions in beer revenue. No goodwill impairment was recorded.
- Year-to-date net income improved despite lower net revenue, supported by higher gross profit and lower total operating expenses, including the absence of $5.3 million of prior-year contract termination costs. Higher interest income also benefited results.
- The company recorded $3.9 million of brewery-asset impairments year to date, compared with $1.3 million in the prior-year period.
- In May 2023, the board raised the share-repurchase authorization to $1.2 billion. By October 20, cumulative repurchases were approximately $910 million, with approximately $290 million remaining.
Outlook, commitments and risks
- The filing provides no specific full-year revenue, earnings or shipment guidance. Management said liquidity resources are expected to be sufficient for future cash requirements.
- At current production projections, Boston Beer expects approximately $39 million of third-party production shortfall fees over time: $5 million for the remainder of 2023, $13 million in 2024 and $12 million in 2025, with the balance thereafter. If remaining volume under the relevant contracts were zero, potential contractual shortfall fees would be approximately $114 million; the contracts extend through 2031. The company also had $39.2 million of production prepayments to expense through 2025.
- Non-cancelable commitments totaled $177.7 million, of which the company expected to pay $160.4 million during the remainder of fiscal 2023.
- Two material legal matters remain unresolved: a securities-litigation appeal following dismissal of the complaint, and a supplier dispute concerning alleged minimum aluminum-can purchases. The company intends to defend both; it cannot estimate a potential loss range for either matter.
- Trademark valuations depend on forecast revenue, royalty and discount-rate assumptions. The company’s sensitivity analysis found that a 1% decrease in annual forecast revenue growth would reduce Dogfish Head trademark fair value by 5.2%; a 1.5% increase in the discount rate would reduce it by 11.7%. Further impairment is possible if estimates change.
- Management noted that advertising and promotional investment may not generate sales growth. Distributor inventory was estimated at approximately five weeks and described as appropriate by brand. Inflation, competition, brand performance and third-party production commitments remain relevant risks.
Important facts for investors to verify
- Whether shipment and depletion declines stabilize, particularly for Truly, Samuel Adams, Angry Orchard and Dogfish Head, and whether growth in Twisted Tea and Hard Mountain Dew continues.
- Whether price increases and cost savings can sustain margins amid inflation and higher per-barrel selling and administrative costs.
- Whether Dogfish Head and Coney Island forecasts support their carrying values and whether further trademark impairments arise.
- Actual third-party production shortfall fees versus the approximately $39 million estimate, and developments in the supplier litigation.
- Future cash generation and capital allocation, including share repurchases, capital expenditures and the adequacy of liquidity.