Business context and reporting period
The Boston Beer Company, Inc. sells alcoholic beverages in the United States and selected international markets, including Samuel Adams, Twisted Tea, Truly, Angry Orchard, Dogfish Head and Hard Mountain Dew. This unaudited Form 10-Q covers the 13 and 39 weeks ended September 24, 2022; comparisons are with periods ended September 25, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | First 39 weeks 2022 | First 39 weeks 2021 |
|---|---|---|---|---|
| Net revenue | $596.5 | $561.6 | $1,642.8 | $1,709.5 |
| Gross profit / margin | $257.7 / 43.2% | $172.7 / 30.7% | $696.5 / 42.4% | $698.0 / 40.8% |
| Operating income (loss) | $38.4 | $(75.8) | $107.6 | $80.9 |
| Net income (loss) | $27.3 | $(58.4) | $78.7 | $66.3 |
| Diluted EPS | $2.21 | $(4.76) | $6.36 | $5.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $225.0 | $51.0 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $70.3 | $120.9 |
Q3 shipments were 2.345 million barrels, up 1.4%, while distributor depletions fell approximately 6%. For the first 39 weeks, shipments declined 8.0% to 6.472 million barrels and depletions declined 7%. Net revenue per barrel increased 4.7% in Q3 and 4.5% year to date, primarily from price increases.
At September 24, 2022, cash and cash equivalents were $222.1, compared with $26.9 at December 25, 2021. Current assets were $528.8 and current liabilities $313.6. The company reported no outstanding credit-facility borrowings and had $150.0 available under its revolving facility. Total liabilities were $456.7; these include operating lease liabilities, and the filing reports no material funded debt balance.
Material changes versus comparable periods
- Q3 net revenue rose 6.2%, chiefly from $25.7 of price increases and $8.4 of higher shipment volume, partly offset by $4.0 of higher returns. Year-to-date net revenue fell 3.9%, as lower volume and higher returns outweighed pricing.
- Q3 gross margin expanded to 43.2%, and the company returned to operating and net profitability from prior-year losses. Comparisons benefit materially from $133.0 of direct and indirect costs associated with the 2021 hard-seltzer slowdown recorded in Q3 2021.
- Year-to-date gross margin increased to 42.4%, while gross profit was nearly flat. Higher pricing and the absence of much of the prior-year hard-seltzer-related costs were partly offset by inflation, product mix, obsolescence and lower production volumes.
- Year-to-date general and administrative expense increased 19.5% to $115.9, primarily from higher salaries and benefits. Advertising, promotional and selling expense declined 6.4% to $439.2, mainly due to lower brand investment.
- Cash from operations rose to $225.0 year to date from $51.0, reflecting higher net income, tax refunds and working-capital movements. Capital spending was lower than in the prior-year period.
Outlook, risks and unusual items
- Management expected to continue offsetting inflationary cost pressures through pricing for the remainder of 2022, but said it could not predict or quantify longer-term inflation effects. The filing provides no specific full-year revenue or earnings guidance.
- At current production projections, the company expects approximately $93 of shortfall fees under third-party brewing agreements, including $5 in the remainder of 2022 and $26 in 2023. If volumes were zero for the remaining terms, contractual shortfall fees would total approximately $186. Some agreements run through 2031.
- The Dogfish Head trademark was impaired by $27.1 in Q3 after updated forecasts reflected ongoing weakness in beer products and the craft-beer sector, partly offset by canned-cocktail growth. The filing warns that changed assumptions could lead to further impairment.
- Q3 inventory obsolescence costs were higher, partly related to Truly reformulation and lower-than-expected shipments. Packaging, ingredients and energy inflation, can-supply constraints, returns and demand shifts remain operating risks.
- A securities class action alleging misleading statements about the company’s business and prospects is pending; the company’s motion to dismiss was awaiting a court decision, and a potential loss range could not be estimated.
- The $150.0 revolving credit facility was scheduled to expire March 31, 2023. The company was negotiating an extension and expected an agreement in Q4 2022 or Q1 2023. It reported covenant compliance and said cash and expected operating cash flows should fund requirements.
Important facts for investors to verify
- Whether shipment and depletion trends improve, especially for Truly, and whether distributor inventory remains near management’s stated four-to-five weeks.
- How price increases, product mix, returns and continuing input-cost inflation affect gross margin and volume.
- The timing and actual cost of third-party production shortfall fees against the $93 current estimate and the contractual exposure.
- Whether Dogfish Head brand performance and valuation assumptions stabilize or result in further impairment.
- The outcome of the securities litigation and the extension terms and availability of the revolving credit facility before its March 2023 expiration.