Boston Beer Company, Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2020; unaudited results compared with the thirteen weeks ended March 30, 2019. The company sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Truly, Twisted Tea, Angry Orchard and Dogfish Head.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $330.6 million | $251.7 million | +31.4% |
| Shipments | 1.423 million barrels | 1.076 million barrels | +32.2% |
| Gross profit | $148.0 million; 44.8% margin | $124.5 million; 49.5% margin | Margin down 4.7 percentage points |
| Operating income | $21.5 million; 6.5% margin | $29.4 million; 11.7% margin | Down 26.9% |
| Net income | $18.2 million | $23.7 million | Down 23.0% |
| Diluted EPS | $1.49 | $2.02 | Down 26.2% |
| Operating cash flow | $18.9 million | $13.6 million | Up $5.3 million |
| Capital expenditures | $27.4 million | $22.1 million | Up $5.3 million |
Revenue growth reflected higher shipments, led by Truly Hard Seltzer and Twisted Tea, and the inclusion of Dogfish Head, acquired in July 2019. Depletions (distributor sales to retailers) rose approximately 36%, while decreases in Angry Orchard and Samuel Adams partly offset growth. Net revenue per barrel declined 0.7% to $232.24. Cost of goods sold per barrel rose to $128.28 from $118.08, contributing to lower gross profit per barrel.
Balance sheet and liquidity
- Cash and cash equivalents were $129.5 million at March 28, 2020, versus $36.7 million at December 28, 2019.
- The company borrowed $100.0 million under its $150.0 million revolving credit facility in March to provide flexibility amid COVID-19 uncertainty. The borrowing rate was 1.15%; $50.0 million remained available. The facility expires March 31, 2023. The company reported compliance with its financial covenants.
- Total assets were $1.194 billion and total liabilities were $435.3 million. Current assets were $336.0 million versus current liabilities of $186.8 million.
- Operating cash flow was $18.9 million; investing activities used $27.3 million, primarily for brewery-related capital investment. Financing activities provided $101.2 million, mainly reflecting the credit-line draw.
- Non-cancelable contract obligations totaled $239.9 million, including advertising, ingredients, equipment and raw-material commitments.
Material changes, outlook and risks
- COVID-19: The company recorded $10.0 million of estimated first-quarter pre-tax impact: $5.8 million of reduced net revenue for estimated keg returns and $4.2 million of other direct costs, including $3.6 million in cost of goods sold and $0.6 million in operating expenses. Reduced on-premise keg demand and higher brewery labor and safety costs were the principal effects. Management expected continued adverse impact, with duration and extent uncertain.
- Cost and spending: Advertising, promotional and selling expense increased 36.5% to $97.9 million, reflecting higher marketing investment, Dogfish Head expenses, payroll and freight. A $1.5 million asset impairment related primarily to brewery equipment at the Cincinnati brewery.
- Distributor inventory: Shipments significantly exceeded depletions; distributor inventory averaged approximately six weeks on hand at quarter-end. Management considered this appropriate for supply constraints and anticipated brand growth, and expected a return toward approximately four weeks later in the year.
- Guidance: Estimated year-to-date depletions through April 11 increased approximately 32% (27% excluding Dogfish Head). The company withdrew its full-year 2020 financial guidance, stating that pandemic-related variables prevented reliable forecasting.
- Other items: The company expected to record approximately $1.8 million of expense in Q4 2020 upon termination of its union pension plan. Management reported no pending or threatened litigation expected to materially affect financial condition or results. No material change to previously reported risk factors was disclosed other than the added COVID-19 risk.
Key facts for investors to verify
- Whether shipment growth converts into sustained depletions, and whether elevated distributor inventories normalize as management expected.
- The duration and financial effects of COVID-19, especially on on-premise demand, keg returns, production costs and supply-chain capacity.
- Future gross margins and operating profitability given higher per-barrel production costs and increased marketing and freight expenses.
- Cash needs, covenant compliance and available borrowing capacity under the revolving credit facility.
- Final purchase-accounting estimates for Dogfish Head and the timing and amount of the expected pension-plan termination expense.