Business context and reporting period
The Boston Beer Company, Inc. sells alcoholic beverages in the U.S. and selected international markets, including Samuel Adams, Truly, Twisted Tea, Angry Orchard and Dogfish Head. This unaudited Form 10-Q covers the 13 weeks and 26 weeks ended June 26, 2021; comparisons are with the periods ended June 27, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenue | $602.8 | $452.1 | $1,147.9 | $782.7 |
| Gross profit / margin | $275.7 / 45.7% | $209.6 / 46.4% | $525.3 / 45.8% | $357.6 / 46.4% |
| Operating income | $80.1 | $78.8 | $156.7 | $100.3 |
| Net income | $59.2 | $60.1 | $124.8 | $78.4 |
| Diluted EPS | $4.75 | $4.88 | $10.01 | $6.37 |
| Operating cash flow | Not separately presented for the quarter | $31.0 | $104.0 | |
| Capital expenditures | Not separately presented for the quarter | $83.5 | $60.1 |
Q2 shipments rose 27.4% to 2.447 million barrels; distributor depletions increased approximately 24%. First-half shipments rose 41.3% to 4.725 million barrels, while depletions increased approximately 33%. Net revenue per barrel increased 4.7% in Q2 and 3.8% in the first half, reflecting pricing and product mix (and, for the first-half comparison, prior-year COVID-related keg-return reductions).
Material changes and liquidity
- Q2 net revenue increased 33.3%, but net income fell 1.6%. Higher advertising, promotional and selling expense—up 61.1%—more than offset much of the gross-profit increase. Gross margin declined 0.7 percentage point year over year in Q2 and 0.6 point for the first half.
- Advertising, promotional and selling expense increased $61.3 million in Q2, including $41.2 million of added brand investment and $20.1 million of higher distributor freight costs. Cost of goods sold per barrel also rose, primarily due to increased production at third-party breweries.
- Cash and cash equivalents were $103.0 million at June 26, 2021, down from $163.3 million at December 26, 2020. First-half operating cash flow fell to $31.0 million, principally because of increased inventory and other working-capital needs; inventory was $247.6 million current, versus $130.9 million at year-end. Management said the Truly finished goods build was intended to support summer demand and was expected to sell in the second half.
- The company reported no borrowings under its $150 million revolving credit line, which was fully available and scheduled to expire March 31, 2023. It said it was in compliance with covenants. Current liabilities were $317.4 million; total liabilities were $476.8 million. Operating lease liabilities totaled $65.3 million.
- Capital spending was $83.5 million for the first half. Management expects cash, future operating cash flow and the unused credit line to fund future requirements.
Outlook, risks and notable items
- Management reduced its 2021 estimated depletions and shipments growth range to 25%–40%, from 40%–50%. Year-to-date depletions through July 10 were estimated up approximately 32%.
- 2021 gross margin is expected at 45%–47%; national price increases are targeted at 1%–3%. Planned full-year increases in advertising, promotional and selling expense were lowered to $80–$100 million from $130–$150 million, excluding freight changes.
- 2021 non-GAAP diluted EPS guidance was cut to $18–$22 from $22–$26; the measure excludes the potentially significant, uncertain impact of stock-based compensation tax accounting (ASU 2016-09). Estimated non-GAAP effective tax rate is approximately 26%.
- Projected 2021 capital expenditures were reduced to $180–$230 million from $250–$350 million, mainly for capacity and supply-chain efficiency. Management said expected capacity could be covered by its breweries and contracted third-party capacity.
- Third-party production arrangements are a key exposure: 54% of first-half volume was brewed and packaged at company-owned breweries. A new capacity agreement included $10.0 million paid for improvements and a further $17.9 million payable subject to conditions. Lower-than-expected demand for certain Truly styles and packages prompted a $0.6 million shortfall-fee expense; maximum contractual shortfall fees would total $63.4 million if remaining-term volume were zero.
- Distributor inventory averaged approximately five weeks at quarter-end and was considered appropriate by management except for Twisted Tea, which had lower-than-planned inventory for certain products. First-half shipments exceeded depletions, raising distributor inventory versus the prior-year period; management expected 3–7 weeks on hand for the rest of the year.
- COVID-19-related costs and keg-return reductions were separately quantified in 2020 but will not be separately reported in 2021, as the company views such costs as part of normal operations. The filing also lists $381.5 million of non-cancelable contractual commitments. Management reported no litigation expected to materially harm financial condition or results, and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether elevated Truly inventory is sold as expected in the second half, and how shipments compare with distributor depletions.
- Progress toward revised growth, gross-margin, EPS and capital-expenditure outlook, including the effect of elevated marketing and freight costs.
- Third-party brewing capacity, production costs and any additional shortfall fees or payments under capacity agreements.
- Cash conversion and working-capital trends, especially inventory, accounts payable and the availability of the revolving credit facility.
- The reconciliation and assumptions underlying non-GAAP EPS guidance, particularly the excluded ASU 2016-09 impact.