BOSTON BEER CO INC quarterly report, Q2 FY2020

Business context and reporting period

The Boston Beer Company, Inc. (NYSE: SAM) filed this unaudited Form 10-Q for the 13 weeks ended June 27, 2020; comparisons are with the 13 weeks ended June 29, 2019. The filing also reports first-half results for the 26 weeks ended June 27, 2020. The company sells alcoholic beverages, including Truly Hard Seltzer, Twisted Tea, Samuel Adams, Angry Orchard and Dogfish Head. Dogfish Head results are included from its July 3, 2019 acquisition, so reported year-over-year comparisons are not fully like-for-like.

Financial and operating highlights

Amounts below are in millions of dollars unless noted otherwise.

• Q2 shipments rose 39.8% to 1.921 million barrels; distributor depletions increased approximately 46%. First-half shipments rose 36.5% to 3.345 million barrels, with depletions up approximately 43%.
• Management attributed volume growth primarily to Truly Hard Seltzer and Twisted Tea, plus Dogfish Head; Samuel Adams and Angry Orchard volumes declined.
• Q2 net revenue per barrel increased 1.6% to $235.34, while cost of goods sold per barrel rose to $126.23 from $115.99. First-half gross profit per barrel declined to $106.92 from $115.69.
• At June 27, 2020, cash was $86.7, current assets $320.7, current liabilities $219.8, total assets $1,208.3 and total liabilities $380.8. Equity was $827.5.
• Operating cash flow of $104.0 was partly offset by $60.1 of capital spending; investing cash outflow was $59.8. Cash increased $50.0 during the first half.
• The company repaid its $100.0 revolver borrowing by quarter-end. The $150.0 credit facility was fully available, with no covenant violation reported. Operating and finance lease liabilities totaled approximately $76.2.

Material changes versus prior comparable periods

• Net revenue grew 42.0% in Q2 and 37.3% in the first half; net income increased 115.9% and 52.0%, respectively. Comparisons benefit from Dogfish Head being included in 2020 but not in reported 2019 results.
• Gross margin contracted by 3.5 percentage points in Q2 and 4.0 points in the first half, mainly reflecting higher production and processing costs, including greater use of third-party breweries. First-half cost of goods sold also included COVID-related keg inventory write-offs.
• Advertising, promotional and selling expenses rose 6.7% in Q2 and 19.6% in the first half, but declined as a share of net revenue as shipments grew faster. General and administrative costs also increased, including Dogfish Head expenses and higher salaries and benefits.
• First-half operating cash flow improved from $55.5 to $104.0. Investing outflow fell from $203.0 in 2019, principally because the prior-year period included the Dogfish Head transaction cash payment.

Outlook, risks and unusual items

• 2020 outlook: Management estimated depletions and shipment growth of 27%–35%, including 1%–2% from Dogfish Head; national price increases of 1%–2%; gross margin of 46%–48%; and non-GAAP diluted EPS of $11.70–$12.70, excluding the impact of ASU 2016-09. The company targeted $70–$80 million of increased advertising, promotional and selling expense and estimated capital expenditures of $180–$200 million. These are estimates, not guarantees.
• Year-to-date depletions through the 28 weeks ended July 11 were estimated up approximately 42%, or 37% excluding Dogfish Head. Management expected lower wholesaler inventory levels than the prior year for the remainder of 2020.
• COVID-19 reduced on-premise keg demand and increased brewery labor and safety costs. The company recorded $14.1 million of first-half pre-tax impacts: $5.8 million for estimated keg returns and $8.3 million for inventory write-downs, safety costs, salaries and other direct costs. Management expected some increased costs to continue; duration and broader effects remained uncertain.
• COVID-19 risks include further demand or on-premise disruption, workforce and supplier constraints, brewery or third-party production interruptions, and higher freight, logistics and operating costs. The filing added this pandemic risk factor; it reported no other material change to previously disclosed risk factors.
• Non-cancelable contract obligations totaled $225.1 million, including advertising, equipment, ingredients and agricultural purchases. A brewing-services agreement was extended through 2024 with minimum commitments and potential shortfall fees; $29.2 million of prepaid fees is to be expensed over the contract period. Subsequent to quarter-end, the company contracted for $12.3 million of additional equipment.
• The company expected to record approximately $2.3 million of expense in Q4 2020 when terminating its union pension plan. It also recorded first-half asset impairments of $2.4 million, primarily for brewery equipment write-downs.
• No pending or threatened litigation was identified as expected to have a material adverse effect. Management reported effective disclosure controls and no material effect on internal controls from remote work.

Important facts for investors to verify

• Whether shipment and depletion growth, particularly in Truly Hard Seltzer and Twisted Tea, is sustained and translates into consumer demand rather than distributor inventory changes.
• Whether 2020 gross-margin and EPS targets remain achievable given higher production costs, COVID-related expenses and the mix of in-house versus third-party brewing.
• The continuing effects of COVID-19 on on-premise demand, brewery capacity, supply chains, costs and wholesaler inventories.
• Actual capital expenditures against the $180–$200 million estimate, and the cash and operating consequences of contract and brewing-service commitments.
• Revolver availability and covenant compliance, cash generation, and the distinction between no revolver borrowing at quarter-end and continuing lease obligations.
• The comparability of reported growth with 2019, given the Dogfish Head acquisition and the filing’s reliance on non-GAAP forward EPS guidance that excludes stock-option tax effects.