Boston Beer Co Inc: Form 10-Q for the period ended Jul 1, 2023

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 and twenty-six week periods ended July 1, 2023, as compared to the thirteen and twenty-six week period ended June 25, 2022. 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 31, 2022.

RESULTS OF OPERATIONS

Thirteen Weeks Ended July 1, 2023 compared to Thirteen Weeks Ended June 25, 2022

Net revenue. Net revenue decreased by $12.9 million, or 2.1%, to $603.3 million for the thirteen weeks ended July 1, 2023, as compared to $616.2 million for the thirteen weeks ended June 25, 2022, primarily as a result of lower shipment volume of $27.7 million, partially offset by price increases of $17.6 million.

Volume. Total shipment volume decreased by 4.5% to 2,310,000 barrels for the thirteen weeks ended July 1, 2023, as compared to 2,419,000 barrels for the thirteen weeks ended June 25, 2022, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Samuel Adams, Hard Mountain Dew, and Dogfish Head brands, partially offset by increases in its Twisted Tea brand.

Depletions for the 2023 second quarter decreased 3% from the prior year, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Hard Mountain Dew, and Samuel Adams brands, partially offset by increases in its Twisted Tea and Dogfish Head brands.

The timing of the July 4th holiday relative to the Company’s 2023 and 2022 fiscal calendars resulted in a depletion and shipment volume benefit in the second quarter of 2023. This volume benefit was the most significant factor in the difference between depletions and shipments on a fiscal calendar basis compared to a comparable weeks basis. On a comparable weeks basis, depletions declined approximately 7% and shipments declined 4.8%.

The Company believes distributor inventory as of July 1, 2023 averaged approximately three weeks on hand and was at an appropriate level for each of its brands except for certain Twisted Tea brand packages that were below targeted levels due to higher than forecasted demand.

Net revenue per barrel. Net revenue per barrel increased by 2.5% to $261.17 per barrel for the thirteen weeks ended July 1, 2023, as compared to $254.77 per barrel for the comparable period in 2022, primarily due to price increases.

Cost of goods sold. Cost of goods sold was $142.49 per barrel for the thirteen weeks ended July 1, 2023, as compared to $144.89 per barrel for the thirteen weeks ended June 25, 2022. The 2023 decrease in cost of goods sold of $2.40, or 1.7%, per barrel was primarily due to contract renegotiations and recipe optimization of $7.9 million, or $3.42 per barrel, network efficiencies resulting in improved brewery performance and decreases in warehousing, interplant freight and inventory obsolescence of $4.6 million, or $1.96 per barrel, partially offset by inflationary impacts of $6.9 million, or $2.97 per barrel.

Inflationary impacts of $6.9 million consist primarily of increased costs of third-party production of $3.0 million, material costs of $2.4 million, and internal brewery costs of $1.5 million.

Gross profit. Gross profit was $118.68 per barrel for the thirteen weeks ended July 1, 2023, as compared to $109.88 per barrel for the thirteen weeks ended June 25, 2022.

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 expenses. Advertising, promotional and selling expenses decreased by $5.5 million, or 3.6%, to $149.4 million for the thirteen weeks ended July 1, 2023, as compared to $154.9 million for the thirteen weeks ended June 25, 2022, due to decreased freight to distributors of $15.7 million from lower rates and volumes, partially offset by an increase in brand and selling costs of $10.2 million, mainly driven by higher salaries and benefits costs of $5.8 million, increased consulting costs of $2.9 million and increased media investments of $2.5 million.

Advertising, promotional and selling expenses were 24.8% of net revenue, or $64.66 per barrel, for the thirteen weeks ended July 1, 2023, as compared to 25.1% of net revenue, or $64.03 per barrel, for the thirteen weeks ended June 25, 2022. This decrease per barrel is primarily due to decreasing advertising, promotional, and selling expenses. 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 2% 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 expenses. General and administrative expenses increased by $6.1 million, or 15.6%, to $44.9 million for the thirteen weeks ended July 1, 2023, as compared to $38.8 million for the thirteen weeks ended June 25, 2022, primarily due to increased consulting costs of $2.5 million and higher salaries and benefits costs of $2.1 million.

Contract termination costs and other. The Company did not incur contract termination costs in the second quarter of 2023 compared to an expense of $0.6 million in the comparable prior year period resulting from further negotiations with suppliers on committed purchase orders on cancelled capital projects.

Impairment of brewery assets. Impairment of brewery assets increased by $1.5 million from the comparable period of 2022, due to higher write-offs of equipment at Company-owned breweries.

Income tax provision. The Company’s effective tax rate for the second quarter was 27.5% compared to 24.7% in the prior year. The increase in the tax rate for the thirteen weeks ended July 1, 2023 as compared to the thirteen weeks ended June 25, 2022 is primarily due to an increase in permanent non-deductible items.

Twenty-six Weeks Ended July 1, 2023 compared to Twenty-six Weeks Ended June 25, 2022

Net revenue. Net revenue decreased by $33.1 million, or 3.2%, to $1.013 billion for the twenty-six weeks ended July 1, 2023, as compared to $1.046 billion for the twenty-six weeks ended June 25, 2022, primarily as a result of lower shipment volume of $60.5 million and $7.0 million of product mix impacts, partially offset by price increases of $35.6 million.

Volume. Total shipment volume decreased by 5.8% to 3,899,000 barrels for the twenty-six weeks ended July 1, 2023, as compared to 4,127,000 barrels for the twenty-six weeks ended June 25, 2022, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Dogfish Head, and Samuel Adams brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands.

Depletions for the 2023 first half decreased 4% from the prior year, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Dogfish Head, and Samuel Adams brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands.

The volume benefit of the timing of the July 4th holiday relative to the Company’s 2023 and 2022 fiscal calendars resulted in a depletion and shipment volume benefit during the first half of the current year period. On a comparable weeks basis, depletions declined approximately 7% and shipments declined 7.6% for the twenty six weeks ended July 1, 2023 as compared to the prior year.

Net revenue per barrel. Net revenue per barrel increased by 2.8% to $260.59 per barrel for the twenty-six weeks ended July 1, 2023, as compared to $253.54 per barrel for the comparable period in 2022, primarily due to price increases.

Cost of goods sold. Cost of goods sold was $150.05 per barrel for the twenty-six weeks ended July 1, 2023, as compared to $147.23 per barrel for the twenty-six weeks ended June 25, 2022. The 2023 increase in cost of goods sold of $2.82, or 1.9% per barrel was primarily due to current year inflationary impacts of $11.1 million, or $2.87 per barrel, higher inventory obsolescence costs of $7.3 million, or $1.88 per barrel, a contract settlement cost of $4.5 million, or $1.16 per barrel, partially offset by contract renegotiations and recipe optimization of $12.1 million, or $3.09 per barrel.

Inflationary impacts of $11.1 million consist primarily of increased material costs of $4.4 million, costs of third-party production of $4.1 million, and internal brewery costs of $2.6 million.

Gross profit. Gross profit was $110.54 per barrel for the twenty-six weeks ended July 1, 2023, as compared to $106.31 per barrel for the twenty-six weeks ended June 25, 2022.

Advertising, promotional and selling expenses. Advertising, promotional and selling expenses decreased by $10.7 million, or 3.8%, to $274.8 million for the twenty-six weeks ended July 1, 2023, as compared to $285.5 million for the twenty-six weeks ended June 25, 2022, primarily due to decreased freight to distributors of $28.3 million from lower rates and volumes, partially offset by an increase in brand investments of $17.6 million, mainly driven by increased salaries and benefits costs of $10.0 million and higher investments in local marketing of $6.7 million.

Advertising, promotional and selling expenses were 27.1% of net revenue, or $70.67 per barrel, for the twenty-six weeks ended July l 1, 2023, as compared to 27.3% of net revenue, or $70.67 per barrel, for the twenty-six weeks ended June 25, 2022. This decrease per barrel is primarily due to decreasing advertising, promotional, and selling expenses.

General and administrative expenses. General and administrative expenses increased by $10.0 million, or 12.8%, to $88.6 million for the twenty-six weeks ended July 1, 2023, as compared to $78.5 million for the twenty-six weeks ended June 25, 2022, primarily due to increased consulting and legal costs.

Contract termination costs and other. The Company did not incur contract termination costs in the first half of 2023 compared to an expense of $5.3 million in the comparable prior year period primarily resulting from further negotiations with a supplier that terminated the agreement.

Impairment of brewery assets. Impairment of brewery assets increased by $1.9 million from the comparable period of 2022, due to higher write-offs of equipment at Company-owned breweries.

Income tax provision. The Company’s effective tax rate year-to-date was 27.5% compared to 25.1% year-to-date 2022. The increase in the tax rate for the twenty-six weeks ended July 1, 2023 as compared to the twenty-six weeks ended June 25, 2022 is primarily due to a decrease in the tax benefit of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as well as an increase to permanent, non-deductible items.

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, stock repurchases, and investment in the Company’s business through capital expenditures.

Cash increased to $207.8 million as of July 1, 2023 from $180.6 million as of December 31, 2022, reflecting cash provided by operating activities and proceeds from the exercise of stock options and sale of investment shares, partially offset by repurchases of the Company's Class A common stock, purchases of property, plant, and equipment, and payments of tax withholdings on stock-based payment awards and investment shares.

Cash used in operating activities consists of net income, adjusted for certain non-cash items, such as depreciation and amortization, stock-based compensation expense, and 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.

Cash provided by operating activities for the twenty-six weeks ended July 1, 2023 was $101.1 million and consisted of net income of $49.1 million, non-cash items of $56.3 million, partially offset by a net increase in operating assets and liabilities of $4.2 million. Cash provided by operating activities for the twenty-six weeks ended June 25, 2022 was $121.5 million and consisted of net income of $51.4 million, non-cash items of $54.3 million, and a net decrease in operating assets and liabilities of $15.8 million. The decrease in cash provided operating activities for the twenty-six weeks ended July 1, 2023 compared to June 25, 2022 is primarily due to income tax refunds received in the prior year period.

The Company used $34.6 million in investing activities during the twenty-six weeks ended July 1, 2023, as compared to $50.3 million during the twenty-six weeks ended June 25, 2022. 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 used in financing activities was $39.3 million during the twenty-six weeks ended July 1, 2023, as compared to $0.3 million provided by financing activities during the twenty-six weeks ended June 25, 2022. The $39.6 million decrease in financing activity cash flows in 2023 compared to 2022 is primarily due to the $45.9 million in repurchases of the Company's Class A common stock in the current year.

During the period from January 1, 2023 through July 21, 2023, the Company repurchased and subsequently retired 161,441 shares of its Class A Common Stock for an aggregate purchase price of $52.5 million. As of July 21, 2023, the Company had repurchased a cumulative total of approximately 14.0 million shares of its Class A Common Stock for an aggregate purchase price of approximately $893.0 million and had approximately $307.0 million remaining on the $1.2 billion stock repurchase expenditure limit set by the Board of Directors.

The Company expects that its cash balance as of July 1, 2023 of $207.8 million, along with its projected future operating cash flow and its unused line of credit balance of $150.0 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 December 16, 2027. 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 July 1, 2023.

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 31, 2022.

Since December 31, 2022, 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 July 1, 2023, 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 July 1, 2023 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 31, 2022, 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.