Boston Beer Company, Inc. — Q1 2021 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2021, compared with the thirteen weeks ended March 28, 2020. Financial amounts below are in millions of dollars unless noted.
Business context and financial performance
The company sells alcoholic beverages in the U.S. and selected international markets. Results reflected strong shipment growth, led by Truly Hard Seltzer and Twisted Tea, as well as growth in Angry Orchard and Dogfish Head products; Samuel Adams shipments declined.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue before excise taxes | $581.7 | $352.2 |
| Net revenue | $545.1 | $330.6 |
| Shipments | 2.278 million barrels | 1.423 million barrels |
| Gross profit / margin | $249.6 / 45.8% | $148.0 / 44.8% |
| Operating income / margin | $76.6 / 14.1% | $21.5 / 6.5% |
| Net income / diluted EPS | $65.6 / $5.26 | $18.2 / $1.49 |
| Operating cash flow | $19.8 | $18.9 |
| Capital expenditures paid | $39.3 | $27.4 |
Financial position and liquidity
- Cash and cash equivalents were $144.7 at March 27, 2021, down from $163.3 at year-end 2020. Cash decreased $18.6 during the quarter.
- Current assets were $450.5 and current liabilities $271.6. The company reported no borrowings under its $150.0 revolving credit facility; the full amount was available, with scheduled expiration in March 2023. It reported compliance with its credit covenants.
- Operating cash flow included net income of $65.6, offset in part by a $74.4 net increase in operating assets and liabilities, notably receivables, inventory, production prepayments and other assets. Investing activities used $38.8; financing activities provided $0.4.
- Inventory was $171.1, including $160.7 current inventory. Third-party production prepayments totaled $93.2 and will be expensed through cost of goods sold over contracts ending in 2025.
Changes versus the prior comparable period
- Net revenue rose 64.9% and shipment volume rose 60.1%. Depletions—distributor sales to retailers—increased approximately 48%.
- Gross margin increased to 45.8% from 44.8%; gross profit per barrel rose to $109.60 from $103.96. Cost of goods sold per barrel edged up, primarily from increased production at third-party breweries, partly offset by company-brewery cost savings.
- Advertising, promotional and selling expense increased 43.9% to $140.9, but declined as a share of net revenue to 25.8% from 29.6%. Increased brand spending and distributor freight costs were key drivers.
- Q1 2020 included $10.0 of identified COVID-19 impacts: $5.8 of reduced net revenue for estimated keg returns and $4.2 of direct costs. The company no longer reports COVID-related direct costs separately, treating them as part of normal operations.
Outlook, commentary and risks
- Management raised its 2021 estimates for depletions and shipments growth to 40%–50% from 35%–45%. Year-to-date depletions through April 10 were estimated up approximately 49%.
- Management targets national price increases of 1%–3% and expects full-year gross margin of 45%–47%. It plans to increase advertising, promotional and selling expenses by $130–$150, excluding changes in freight costs.
- 2021 non-GAAP diluted EPS guidance, excluding the impact of ASU 2016-09, increased to $22–$26 from $20–$24; estimated non-GAAP effective tax rate is approximately 26.5%. These are non-GAAP measures and the company did not provide a forward-looking GAAP reconciliation.
- Estimated 2021 capital expenditures were reduced to $250–$350 from $300–$400, mainly for capacity and supply-chain efficiency. Management expects owned breweries and existing contracted third-party capacity to cover 2021 needs.
- Distributor inventory averaged approximately seven weeks on hand at quarter-end, which management considered appropriate for expected seasonal demand and supply-chain constraints. Shipment growth materially exceeded depletion growth; management expects wholesaler inventory to remain between three and seven weeks for the rest of the year.
- Production arrangements include $336.9 of projected contractual commitments. A new third-party facility agreement included $10.0 already paid and a further $17.9 payable subject to closing and other conditions. If volume over the remaining production-contract terms were zero, contractual shortfall fees would total $67.6 through 2026; management said current projections indicate commitments will be met.
- Management cautioned that increased brand investment may not generate sales growth and actual results, including guidance and capital spending, may differ materially. The filing reported no pending or threatened litigation expected to materially adversely affect financial condition or results, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether shipment growth converts into sustained consumer demand, given shipments outpaced depletions and distributor inventory was about seven weeks.
- Whether Truly and Twisted Tea growth, pricing and brand investment support the raised growth and EPS outlook without materially pressuring margins.
- How third-party brewing capacity, cost per barrel, contractual commitments and potential shortfall fees evolve as production needs change.
- Whether operating cash generation can support the planned $250–$350 of capital expenditures while maintaining liquidity.
- The impact of stock-option exercises and ASU 2016-09 on reported GAAP taxes and earnings; Q1 included an $8.6 tax benefit related to share-based awards.