Boston Beer Company, Inc. — Q3 2021 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 and Dogfish Head. This unaudited filing covers the 13 and 39 weeks ended September 25, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in millions except per-share data and volume.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net revenue | $561.6 | $492.8 | $1,709.5 | $1,275.5 |
| Shipments | 2.312m barrels | 2.080m | 7.037m barrels | 5.425m |
| Gross profit / margin | $172.7 / 30.7% | $240.6 / 48.8% | $698.0 / 40.8% | $598.2 / 46.9% |
| Operating income (loss) | $(75.8) | $101.8 | $80.9 | $202.1 |
| Net income (loss) | $(58.4) | $80.8 | $66.3 | $159.1 |
| Diluted EPS | $(4.76) | $6.51 | $5.33 | $12.90 |
Q3 revenue rose 14.0%, with shipments up 11.2%; net revenue per barrel increased 2.6% to $242.93. Year-to-date revenue rose 34.0%, shipments increased 29.7%, and net revenue per barrel rose 3.3% to $242.93. Depletions (distributor sales to retailers) increased approximately 11% in Q3 and 24% year to date.
Q3 cost of goods sold rose 54.2% to $388.9 million, compressing gross margin to 30.7%. Advertising, promotional and selling expense increased 54.4% to $166.8 million, including higher brand investment and freight expense. For the 39 weeks, operating income declined 60.0% and net income declined 58.3% year over year.
Cash, liquidity and obligations
- Cash and equivalents were $86.5 million at September 25, 2021, down from $163.3 million at December 26, 2020. Current assets were $431.1 million and current liabilities $285.5 million.
- Operating cash flow for the 39 weeks was $51.0 million, versus $208.9 million a year earlier. Capital spending was $120.9 million; investing cash outflow was $119.6 million. Cash declined $76.8 million over the period.
- No borrowings were outstanding on the $150 million revolving credit facility, which was available in full and matures March 31, 2023. The company reported compliance with its financial covenants. Interest expense was $0.1 million year to date. Operating lease liabilities totaled $63.3 million.
- Inventory was $211.7 million, including $53.7 million of recorded obsolescence reserves. Total assets were $1.464 billion and stockholders’ equity was $1.029 billion.
Material changes and unusual items
Management attributed the sharp Q3 earnings deterioration to slower hard-seltzer category growth, particularly lower-than-planned demand for certain Truly products and packages. Distributor inventory of Truly was significantly above plan; the company adjusted production and shipments and worked with distributors to reduce stocks.
- Q3 included $102.4 million of direct slowdown-related costs: $54.3 million of inventory-related charges, $35.4 million of contract termination costs and $12.7 million of asset impairment.
- Q3 also included $30.6 million of indirect slowdown-related costs, including sourcing and warehousing, under-absorption and brewery downtime, product return provisions, and other costs. The filing reports $143.9 million in combined direct and indirect costs for the 39-week period.
- Inventory and production exposures remain material: third-party production prepayments were $74.4 million, and at current projections the company expects about $57 million of future shortfall fees under production arrangements. If volume were zero for the remaining contract terms, contractual shortfall fees would total approximately $175 million.
Year-to-date operating cash flow was pressured by lower earnings and a $94.0 million net increase in operating assets and liabilities, including higher inventory and income tax receivables. Management said inventory, net of reserves, was expected to sell through the first quarter of 2022.
Outlook, risks and contingencies
- 2021 outlook: estimated depletions and shipments growth of 18%–22%; non-GAAP diluted EPS of $2–$6; gross margin of 40%–42%; national price increases of 2%–3%; and capital expenditures of $160–$200 million. The EPS estimate is highly sensitive to volume, especially Truly. Management’s outlook cites $132 million of full-year combined hard-seltzer slowdown costs, with $95.2 million incurred in the first nine months and $36.8 million estimated for Q4.
- 2022 preliminary targets: depletion and shipment growth from mid-single digits to low-double digits; price increases of 3%–6%; gross margin of 45%–48%; capital expenditures of $140–$190 million; and non-GAAP effective tax rate of approximately 26%. Management said more detailed guidance would follow with full-year results. The company cautioned that volume assumptions, particularly for hard seltzer, could change materially.
- Planned advertising and promotional expense increases were $80–$100 million for 2021 and $10–$30 million for 2022, excluding changes in freight. Management cautioned that increased brand spending may not produce volume growth. Forward non-GAAP measures exclude the unpredictable effects of stock-based payment accounting; the filing does not provide a forward reconciliation.
- Production capacity commitments, excess Truly inventory, cost inflation, freight rates, and the risk that future demand differs from forecasts are key operating uncertainties. The company also cited ongoing COVID-19 impacts as part of normal operations and said market-risk exposures had not changed significantly.
- Pending litigation includes two securities class action complaints alleging misleading statements or omissions about the business and prospects, and a proposed consumer class action alleging misleading Truly product labeling. The company intends to defend the cases; potential loss ranges were not estimable.
- New licensing agreements with Jim Beam Brands and PepsiCo are expected to produce initial shipments in early 2022. The company said it expected cash, operating cash flow and available credit to fund future requirements.
Most important facts for investors to verify
- Reconcile the filing’s reported $143.9 million of year-to-date direct and indirect slowdown-related costs with the $132 million full-year outlook estimate and the stated $95.2 million incurred through nine months.
- Track Truly sell-through, distributor inventory reduction, inventory reserves and actual product destruction or expiration costs.
- Compare realized 2021 earnings, gross margin, volumes and capital expenditures with management’s highly volume-sensitive guidance; assess whether the preliminary 2022 assumptions hold.
- Monitor third-party production shortfall fees, contract commitments and liquidity as capital spending continues; review any changes in available credit or covenant compliance.
- Follow developments in the securities and product-labeling lawsuits, for which potential loss was not estimable in this filing.