Boston Beer Co Inc: Form 10-Q for the period ended Sep 30, 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 thirty-nine week periods ended September 30, 2023, as compared to the thirteen and thirty-nine week period ended September 24, 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 September 30, 2023 compared to Thirteen Weeks Ended September 24, 2022

Net revenue. Net revenue increased by $5.1 million, or 0.9%, to $601.6 million for the thirteen weeks ended September 30, 2023, as compared to $596.5 million for the thirteen weeks ended September 24, 2022, primarily as a result of price increases of $24.1 million partially offset by lower shipment volume of $14.9 million and $2.3 million of product mix impacts.

Volume. Total shipment volume decreased by 2.5% to 2,286,000 barrels for the thirteen weeks ended September 30, 2023, as compared to 2,345,000 barrels for the thirteen weeks ended September 24, 2022, reflecting decreases in the Company’s Truly, Samuel Adams, Angry Orchard and Dogfish Head brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands.

Depletions for the thirteen weeks ended September 30, 2023 decreased 6% from the prior year, reflecting decreases in the Company’s Truly, Angry Orchard, Samuel Adams and Dogfish Head brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands.

The Company believes distributor inventory as of September 30, 2023 averaged approximately five weeks on hand and was at an appropriate level for each of its brands.

Net revenue per barrel. Net revenue per barrel increased by 3.5% to $263.14 per barrel for the thirteen weeks ended September 30, 2023, as compared to $254.35 per barrel for the comparable period in 2022, primarily due to price increases.

Cost of goods sold. Cost of goods sold was $143.01 per barrel for the thirteen weeks ended September 30, 2023, as compared to $144.44 per barrel for the thirteen weeks ended September 24, 2022. The 2023 decrease in cost of goods sold of $1.43, or 1.0%, per barrel was primarily due to decreases in inventory obsolescence of $9.4 million, or $4.11 per barrel, contract renegotiations and recipe optimization of $9.3 million, or $4.07 per barrel, partially offset inflationary impacts of $9.9 million, or $4.33 per barrel, and other cost of goods sold impacts of $5.5 million, or $2.41 per barrel.

Inflationary impacts of $9.9 million consist primarily of increased material costs of $5.8 million, costs of third-party production of $2.3 million, and internal brewery costs of $1.8 million.

Gross profit. Gross profit was $120.13 per barrel for the thirteen weeks ended September 30, 2023, as compared to $109.91 per barrel for the thirteen weeks ended September 24, 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 $1.1 million, or 0.7%, to $152.6 million for the thirteen weeks ended September 30, 2023, as compared to $153.7 million for the thirteen weeks ended September 24, 2022, due to decreased freight to distributors of $10.8 million from lower rates and volumes, partially offset by an increase in brand and selling costs of $9.6 million, mainly driven by higher salaries and benefits costs and increased media investments.

Advertising, promotional and selling expenses were 25.4% of net revenue, or $66.74 per barrel, for the thirteen weeks ended September 30, 2023, as compared to 25.8% of net revenue, or $65.55 per barrel, for the thirteen weeks ended September 24, 2022. 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 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 $4.9 million, or 13.0%, to $42.3 million for the thirteen weeks ended September 30, 2023, as compared to $37.4 million for the thirteen weeks ended September 24, 2022, primarily due to higher salaries and benefits costs and increased consulting costs.

Impairment of intangible assets. Impairment of intangible assets reflects a $16.4 million non-cash impairment charge recorded for the Dogfish Head and Coney Island brands, taken as a result of the Company’s annual impairment analysis as of September 1, 2023. The impairment determination was primarily based on the latest forecasts of brand performance which has been below Company forecasts for the respective brands. In the third quarter of 2022, the Company recorded an impairment charge of $27.1 million for the Dogfish Head brand.

Impairment of brewery assets. Impairment of brewery assets of $1.9 million increased by $0.7 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 third quarter was 29.3% compared to 28.6% in the prior year. The increase in the tax rate for the thirteen weeks ended September 30, 2023 as compared to the thirteen weeks ended September 24, 2022 is primarily due to a reduction in estimated annual pre-tax income due to non-cash impairment charges, with no corresponding decrease in permanent non-deductible items.

Thirty-nine Weeks Ended September 30, 2023 compared to Thirty-nine Weeks Ended September 24, 2022

Net revenue. Net revenue decreased by $27.9 million, or 1.7%, to $1,614.9 million for the thirty-nine weeks ended September 30, 2023, as compared to $1,642.8 million for the thirty-nine weeks ended September 24, 2022, primarily as a result of lower shipment volume of $75.4 million and $10.9 million of product mix impacts, partially offset by price increases of $61.4 million.

Volume. Total shipment volume decreased by 4.6% to 6,175,000 barrels for the thirty-nine weeks ended September 30, 2023, as compared to 6,472,000 barrels for the thirty-nine weeks ended September 24, 2022, reflecting decreases in the Company’s Truly, Angry Orchard, Samuel Adams, and Dogfish Head brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands. Comparable weeks shipments year-to-date decreased 5.5%.

Depletions for the thirty-nine weeks ended September 30, 2023, decreased 6% from the prior year, reflecting decreases in the Company’s Truly, Angry Orchard, Samuel Adams and Dogfish Head brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands. Comparable weeks depletions year-to-date decreased 5%.

Net revenue per barrel. Net revenue per barrel increased by 3.0% to $261.53 per barrel for the thirty-nine weeks ended September 30, 2023, as compared to $253.83 per barrel for the comparable period in 2022, primarily due to price increases.

Cost of goods sold. Cost of goods sold was $147.44 per barrel for the thirty-nine weeks ended September 30, 2023, as compared to $146.22 per barrel for the thirty-nine weeks ended September 24, 2022. The 2023 increase in cost of goods sold of $1.22, or 0.8% per barrel was primarily due to current year inflationary impacts of $21.0 million, or $3.40 per barrel, a contract settlement cost of $4.5 million, or $0.73 per barrel, and other cost of goods sold impacts of $5.5 million, or $0.89 per barrel, partially offset by contract renegotiations and recipe optimization of $21.4 million, or $3.47 per barrel, and decreases in inventory obsolescence of $2.1 million, or $0.34 per barrel.

Inflationary impacts of $21.0 million consist primarily of increased material costs of $10.2 million, costs of third-party production of $6.4 million, and internal brewery costs of $4.4 million.

Gross profit. Gross profit was $114.09 per barrel for the thirty-nine weeks ended September 30, 2023, as compared to $107.61 per barrel for the thirty-nine weeks ended September 24, 2022.

Advertising, promotional and selling expenses. Advertising, promotional and selling expenses decreased by $11.8 million, or 2.7%, to $427.4 million for the thirty-nine weeks ended September 30, 2023, as compared to $439.3 million for the thirty-nine weeks ended September 24, 2022, primarily due to decreased freight to distributors of $39.0 million from lower rates and volumes, partially offset by an increase in brand investments of $27.2 million, mainly driven by increased salaries and benefits costs and higher investments in local marketing and media.

Advertising, promotional and selling expenses were 26.5% of net revenue, or $69.21 per barrel, for the thirty-nine weeks ended September 30, 2023, as compared to 26.7% of net revenue, or $67.86 per barrel, for the thirty-nine weeks ended September 24, 2022. This increase per barrel is primarily due to advertising, promotional, and selling expenses decreasing at a lower rate than shipments.

General and administrative expenses. General and administrative expenses increased by $14.9 million, or 12.9%, to $130.8 million for the thirty-nine weeks ended September 30, 2023, as compared to $115.9 million for the thirty-nine weeks ended September 24, 2022, primarily due to increased consulting and increased salaries and benefits costs.

Impairment of intangible assets. Impairment of intangible assets reflects a $16.4 million non-cash impairment charge recorded for the Dogfish Head and Coney Island brands, taken as a result of the Company’s annual impairment analysis as of September 1, 2023. The impairment determination was primarily based on the latest forecasts of brand performance which has been below Company forecasts for the respective brands. In the third quarter of 2022, the Company recorded an impairment charge of $27.1 million for the Dogfish Head brand.

Impairment of brewery assets. Impairment of brewery assets of $3.9 million increased by $2.6 million from the comparable period of 2022, due to higher write-offs of equipment at Company-owned breweries.

Contract termination costs and other. The Company incurred contract termination costs in the thirty-nine weeks ended September 24, 2022 of $5.3 million primarily resulting from further negotiations with a supplier that terminated the agreement.

Income tax provision. The Company’s effective tax rate year-to-date was 28.4% compared to 26.3% year-to-date 2022 primarily due to an increase to permanent, non-deductible items as well as a decrease in the tax benefit related to stock-based compensation awards.

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 $310.8 million as of September 30, 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 thirty-nine weeks ended September 30, 2023 was $232.4 million and consisted of non-cash items of $94.7 million, net income of $94.4 million, and a net decrease in operating assets and liabilities of $43.3 million. Cash provided by operating activities for the thirty-nine weeks ended September 24, 2022 was $225.0 million and consisted of non-cash items of $108.0 million, net income of $78.7 million, and a net decrease in operating assets and liabilities of $38.3 million. The increase in cash provided operating activities for the thirty-nine weeks ended September 30, 2023 compared to September 24, 2022 is primarily due to decreases in inventory compared to increases in the comparable prior year period, higher net income, and lower impairment of intangible assets, partially offset by income tax refunds received in the prior year.

The Company used $47.1 million in investing activities during the thirty-nine weeks ended September 30, 2023, as compared to $69.8 million during the thirty-nine weeks ended September 24, 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 $55.1 million during the thirty-nine weeks ended September 30, 2023, as compared to $0.6 million provided by financing activities during the thirty-nine weeks ended September 24, 2022. The $55.7 million decrease in financing activity cash flows in 2023 compared to 2022 is primarily due to the $62.5 million in repurchases of the Company's Class A common stock in the current year, partially offset by proceeds from the exercise of stock options and sale of investment shares.

During the period from January 1, 2023 through October 20, 2023, the Company repurchased and subsequently retired 207,997 shares of its Class A Common Stock for an aggregate purchase price of $69.4 million. As of October 20, 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 $910.0 million and had approximately $290.0 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 September 30, 2023 of $310.8 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

Valuation of Goodwill and Indefinite Lived Intangible Assets

The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.

Significant judgement is required to estimate the fair value of the Dogfish Head trademark. Accordingly, the Company obtains the assistance of third-party valuation specialists as part of the impairment evaluation. In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, the discount rate, and the after-tax royalty savings expected from ownership of the trademark. The assumptions and projections used in the estimate of fair value are consistent with recent trends and represent the projections used in Company’s current strategic operating plans which include reductions in revenues from the Dogfish Head beer products which were partially offset with revenue growth from the new Dogfish Head canned cocktails products that were launched in 2021. These assumptions reflect management’s estimates of future economic and competitive conditions and consider many factors including macroeconomic conditions, industry growth rates, and competitive activities and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an additional impairment loss for the asset. The recognition of any resulting impairment loss could have a material adverse impact on our financial statements.

The Company performed a sensitivity analysis on its significant assumptions used in the Dogfish Head trademark fair value calculation and determined the following:

A decrease in the annual forecasted revenue growth rate of 1.0% would result in a 5.2% decrease to the current fair value of $55.6 million.

A decrease in the discount rate of 1.5% would result in a 15.3% increase to the current fair value of $55.6 million and an increase in the discount rate of 1.5% would result in a 11.7% decrease to the current fair value of $55.6 million.

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 September 30, 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 as of September 30, 2023 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 September 30, 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.