Business context and reporting period
The Boston Beer Company, Inc. (NYSE: SAM) produces and sells alcoholic beverages, including Truly hard seltzer, Twisted Tea, Samuel Adams, Angry Orchard, Dogfish Head and newer spirits-based ready-to-drink products. Sales are primarily through independent distributors in the United States.
This is the 10-K for the fiscal year ended December 31, 2022, a 53-week year, compared with the 52-week year ended December 25, 2021. It is an annual filing; the supplied text does not provide standalone fourth-quarter financial results.
Key financial metrics
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net revenue | $2,090.3 million | $2,057.6 million |
| Gross profit / margin | $862.0 million / 41.2% | $797.8 million / 38.8% |
| Operating income / margin | $90.8 million / 4.3% | $8.0 million / 0.4% |
| Net income | $67.3 million | $14.6 million |
| Diluted EPS | $5.44 | $1.17 |
| Operating cash flow | $199.9 million | $56.3 million |
| Capital expenditures | $90.6 million | $147.9 million |
| Cash and cash equivalents at year-end | $180.6 million | $26.9 million cash, plus $39.5 million restricted cash |
Revenue increased 1.6%; barrels sold fell 3.8% to 8.183 million. Depletions (distributor sales to retailers) declined approximately 5%, or 6% on a comparable 52-week basis. Net revenue per barrel rose 5.6% to $255.44, largely reflecting price increases. The company reported no borrowings outstanding under its $150 million revolving credit facility at year-end. Total liabilities were $352.2 million, including operating lease liabilities; the filing reports no funded debt outstanding at year-end.
Changes versus the prior comparable period
- Net income rose to $67.3 million from $14.6 million, but the comparison is substantially affected by $196.4 million of direct and indirect costs recorded in 2021 following the hard-seltzer slowdown. These included inventory-related costs, unfavorable production absorption, contract termination costs, returns and impairments.
- Gross margin improved to 41.2% from 38.8%, reflecting 2021 hard-seltzer-related charges and 2022 pricing, partly offset by inflation, unfavorable mix, higher inventory obsolescence and returns.
- Cost of goods sold per barrel increased $1.95 to $150.10. The company cited $48.5 million of inflationary impacts, higher brewery processing costs, inventory obsolescence and warehousing costs.
- Advertising, promotional and selling expense declined 4.7% to $578.4 million, primarily from lower brand investment and media costs. General and administrative expense increased 17.9% to $157.5 million, mainly due to salaries and benefits.
- Operating cash flow increased to $199.9 million, principally due to higher earnings, tax refunds and reduced third-party production prepayments. Investing cash outflow declined to $88.5 million.
Outlook, management commentary, risks and unusual items
- Management targets a 2% to 8% decline in 2023 shipment and depletion volume, while stating it believes it can meet the target and return to growth in future years. This outlook is uncertain and depends on demand, competition and execution.
- Management expects 2023 capital investment of $100 million to $140 million. It expects approximately 30% of production to be at third-party facilities in 2023 and anticipates lower reliance on City Brewing than in 2022.
- At current volume projections, the company expects approximately $72 million in third-party production shortfall fees over time, including $19 million in 2023. It incurred $3.0 million in such fees in 2022. The filing estimates a maximum of approximately $127 million over contract terms if remaining production volumes were zero.
- The hard-seltzer category declined an estimated 15% by volume in 2022; Truly’s performance weighed on company volume and prompted inventory, production and capacity adjustments. Twisted Tea and Hard Mountain Dew partially offset declines in other brands. Distributor inventory averaged about five weeks at year-end.
- A $27.1 million non-cash impairment was recorded for the Dogfish Head trademark, reflecting weaker brand forecasts and craft-beer trends. The trademark’s reported fair value after impairment was $71.4 million. No goodwill impairment was recorded.
- Material risks include intense competition, changing consumer demand, inflation and supply availability, dependence on distributors and third-party production, demand-forecasting and inventory risk, and potential underutilization of owned brewery capacity. The company also disclosed foreign-currency exposure and does not currently hedge it.
- Pending matters include an appeal in securities litigation after the court granted the company’s motion to dismiss, and a can-supplier dispute alleging missed minimum purchase volumes. The company contests the supplier’s claims; it could not estimate a potential loss range for either matter as applicable.
- The company said cash, future operating cash flows and its credit facility should be sufficient for future requirements. The facility was extended to December 16, 2027; no borrowings were outstanding at year-end and the company reported covenant compliance.
- The Class B shareholder, C. James Koch, held all Class B shares and controls the vote on most matters, including election of a board majority. Class A shares generally have limited voting rights.
Important facts for investors to verify
- Confirm subsequent depletion, shipment and distributor inventory trends, especially for Truly, and whether 2023 volume targets were achieved.
- Track whether pricing can offset inflation and higher production costs without materially weakening demand or mix.
- Monitor inventory reserves, stale-product returns, production utilization and the timing and amount of expected contract shortfall fees.
- Review delivery of planned capital spending and the company’s ability to use owned and contracted production capacity efficiently.
- Follow the Dogfish Head brand’s performance and assumptions underlying the trademark valuation, along with any further impairment risk.
- Check developments in the securities appeal and Ardagh supplier dispute, for which potential losses were not estimable in the filing.
- Note that the independent auditor issued an unqualified opinion on the financial statements and internal controls; management also assessed disclosure controls and internal control over financial reporting as effective at year-end.