Boston Beer Co Inc: Form 10-Q for the period ended Mar 26, 2022

The following is a discussion of the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of the Company for the thirteen week period ended March 26, 2022, as compared to the thirteen week period ended March 27, 2021. This discussion should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.

RESULTS OF OPERATIONS

Thirteen Weeks Ended March 26, 2022 compared to Thirteen Weeks Ended March 27, 2021

Net revenue. Net revenue decreased by $115.0 million, or 21.1%, to $430.1 million for the thirteen weeks ended March 26, 2022, as compared to $545.1 million for the thirteen weeks ended March 27, 2022, primarily as a result of a decrease in shipments, partially offset by price increases.

Volume. Total shipment volume decreased by 25.1% to 1,705,000 barrels for the thirteen weeks ended March 26, 2022, as compared to 2,275,000 barrels for the thirteen weeks ended March 27, 2021, reflecting decreases in the Company’s Truly Hard Seltzer, Twisted Tea, Angry Orchard, and Dogfish Head brands, partially offset by increases in its Samuel Adams brand.

Depletions, or sales by distributors to retailers, of the Company’s products for the thirteen weeks ended March 26, 2022 decreased by approximately 7% compared to the thirteen weeks ended March 27, 2021, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, and Dogfish Head brands, partially offset by increases in its Twisted Tea brand. The Company’s Samuel Adams brand depletion volume was nearly equal in both periods.

The Company believes distributor inventory as of March 26, 2022 averaged approximately five weeks on hand and was at an appropriate level for each of its brands. The Company expects distributors will keep inventory levels below 2021 levels in terms of weeks on hand, as the need for peak season inventory prebuilds is greatly reduced due to our increased production capacity.

Net revenue per barrel. Net revenue per barrel increased by 5.4% to $252.27 per barrel for the thirteen weeks ended March 26, 2022, as compared to $239.31 per barrel for the comparable period in 2021, primarily due to price increases.

Cost of goods sold. Cost of goods sold was $150.83 per barrel for the thirteen weeks ended March 26, 2022, as compared to $129.71 per barrel for the thirteen weeks ended March 27, 2021. The 2022 increase in cost of goods sold of $21.12 per barrel was primarily due to higher supply chain costs and higher materials costs.

Gross profit. Gross profit was $101.44 per barrel for the thirteen weeks ended March 26, 2022, as compared to $109.60 per barrel for the thirteen weeks ended March 27, 2021.

The Company includes freight charges related to the movement of finished goods from its manufacturing locations to distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to those of other entities that classify costs related to distribution differently.

Advertising, promotional and selling. Advertising, promotional and selling expenses decreased by $10.2 million, or 7.3%, to $130.6 million for the thirteen weeks ended March 26, 2022, as compared to $140.9 million for the thirteen weeks ended March 27, 2021. The decrease was primarily due to a net decrease in brand investments of $9.4 million, mainly driven by lower media costs, partially offset by higher investments in local marketing and decreased freight to distributors of $0.8 million primarily due to lower volumes that were partially offset by higher rates.

Advertising, promotional and selling expenses were 30.4% of net revenue, or $76.61 per barrel, for the thirteen weeks ended March 26, 2022, as compared to 25.8% of net revenue, or $61.84 per barrel, for the thirteen weeks ended March 27, 2021. This increase per barrel is primarily due to advertising, promotional and selling expenses decreasing at a lower rate than shipments. The Company invests in advertising and promotional campaigns that it believes will be effective, but there is no guarantee that such investments will generate sales growth.

The Company conducts certain advertising and promotional activities in its distributors’ markets, and the distributors make contributions to the Company for such efforts. These amounts are included in the Company’s condensed consolidated statements of comprehensive operations as reductions to advertising, promotional and selling expenses. Historically, contributions from distributors for advertising and promotional activities have amounted to between 1% and 3% of net sales. The Company may adjust its promotional efforts in the distributors’ markets, if changes occur in these promotional contribution arrangements, depending on industry and market conditions.

General and administrative. General and administrative expenses increased by $7.8 million, or 24.3%, to $39.7 million for the thirteen weeks ended March 26, 2022, as compared to $31.9 million for the thirteen weeks ended March 27, 2021. The increase was primarily due to increased salaries and benefits costs and increases in external services provided by third parties.

Contract termination costs and other. During the first quarter of 2022 the Company recorded $4.8 million in contract termination costs in connection with the termination of a third-party production contract. This contract termination eliminated future production shortfall fees that the Company estimated would have been incurred over the duration of the contract.

Impairment of assets. Impairment of long-lived assets decreased by $0.2 million from the comparable period of 2021, primarily due to lower write-downs of equipment at Company-owned breweries.

Income tax (benefit) expense. During the thirteen weeks ended March 26, 2022, the Company’s effective tax rate, excluding the impact of ASU 2016-09, was a tax benefit of 27.7% compared to a tax provision of 25.6% for the thirteen weeks ended March 27, 2021, primarily due to a decrease in pre-tax income.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of liquidity are its existing cash balances, cash flows from operating activities and amounts available under its revolving credit facility. The Company’s material cash requirements include working capital needs, satisfaction of contractual commitments, and investment in the Company’s business through capital expenditures.

Cash decreased to $15.7 million as of March 26, 2023 from $26.8 million as of December 25, 2021, reflecting cash used in operating activities, purchases of property, plant and equipment and payments of tax withholdings on stock-based payment awards and investment shares, partially offset by cash borrowed on the Company's revolving line of credit net of repayments and proceeds from the exercise of stock options and sale of investment shares.

Cash used in or provided by operating activities consists of net (loss) income, adjusted for certain non-cash items, such as depreciation and amortization, stock-based compensation expense, other non-cash items included in operating results, and changes in operating assets and liabilities, such as accounts receivable, inventory, accounts payable and accrued expenses. In the first quarter of 2022 compared to the first quarter of 2021, the Company’s average account receivable payment terms shifted slightly toward customers with longer payment terms. This impact for the remainder of the year ending December 31, 2022 is uncertain due to product and geographical mix but the Company does not expect this to significantly impact its liquidity.

Cash used in operating activities for the thirteen weeks ended March 26, 2022 was $41.0 million and primarily consisted of a net increase in operating assets and liabilities of $63.7 million and a net loss of $2.0 million, partially offset by non-cash items of $24.7 million. Cash provided by operating activities for the thirteen weeks ended March 27, 2021 was $19.8 million and primarily consisted of net income of $65.6 million and non-cash items of $28.6 million, partially offset by a net increase in operating assets and liabilities of $74.4 million. The decrease in cash provided by operating activities for the thirteen weeks ended March 26, 2022 compared to the prior period is primarily due to lower net income compared to the prior year and increases in accounts receivable and accrued expenses.

The Company used $23.7 million in investing activities during the thirteen weeks ended March 26, 2022, as compared to $38.8 million during the thirteen weeks ended March 27, 2021. Investing activities primarily consisted of capital investments made mostly in the Company’s breweries to drive efficiencies and cost reductions and support product innovation and future growth.

Cash provided by financing activities was $14.2 million during the thirteen weeks ended March 26, 2022, as compared to $0.4 million during the thirteen weeks ended March 27, 2021. The $13.7 million increase in cash provided by financing activities in 2022 from 2021 is primarily due to $30.0 million of cash borrowed on the Company's revolving line of credit, net of $15.0 million repaid.

During the thirteen weeks ended March 26, 2022 and the period from March 26, 2022 through April 16, 2022, the Company did not repurchase any shares of its Class A Common Stock. As of April 16, 2022, the Company had repurchased a cumulative total of approximately 13.8 million shares of its Class A Common Stock for an aggregate purchase price of $840.7 million and had approximately $90.3 million remaining on the $931.0 million stock repurchase expenditure limit set by the Board of Directors.

The Company expects that its cash balance as of March 26, 2022 of $15.7 million, along with future operating cash flow and the unused balance of the Company’s line of credit of $135.0 million, will be sufficient to fund future cash requirements. The Company’s $150.0 million credit facility has a term not scheduled to expire until March 31, 2023. The Company is currently in negotiations on an extension of the term on the credit facility and expects an agreement to be reached during the second or third quarter of 2022. As of the date of this filing, the Company was not in violation of any of its covenants to the lender under the credit facility.

Critical Accounting Policies

There were no material changes to the Company’s critical accounting policies during the three-month period ended March 26, 2022.

FORWARD-LOOKING STATEMENTS

In this Quarterly Report on Form 10-Q and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect subsequent events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include the factors set forth below in addition to the other information set forth in this Quarterly Report on Form 10-Q and in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 25, 2021.

Since December 25, 2021, there have been no significant changes in the Company’s exposures to interest rate or foreign currency rate fluctuations. The Company currently does not enter into derivatives or other market risk sensitive instruments for the purpose of hedging or for trading purposes.

As of March 26, 2022, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting that occurred during the thirteen weeks ended March 26, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Part I, "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 25, 2021, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results.