Boston Beer Co Inc: Form 10-Q for the period ended Mar 30, 2024

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 periods ended March 30, 2024, as compared to the thirteen period ended April 1, 2023. 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 30, 2023.

RESULTS OF OPERATIONS

Thirteen Weeks Ended March 30, 2024 compared to Thirteen Weeks Ended April 1, 2023

Net revenue. Net revenue increased by $16.1 million, or 3.9%, to $426.1 million for the thirteen weeks ended March 30, 2024, as compared to $410.0 million for the thirteen weeks ended April 1, 2023, due to increased pricing impacts of $8.1 million, a $4.4 million reduction in returns, and increased sales volume impacts of $3.6 million.

Volume. Total shipment volume increased by 0.9% to 1,592,000 barrels for the thirteen weeks ended March 30, 2024, as compared to 1,579,000 barrels for the thirteen weeks ended April 1, 2023, primarily due to growth in Twisted Tea offset by declines in Truly Hard Seltzer and other brands. Depletions for the thirteen weeks ended March 30, 2024 were flat from the prior year.

Shipments were higher than depletions as the Company believes wholesalers built inventories to support the upcoming peak selling season. The Company believes distributor inventory as of March 30, 2024 was at an appropriate level for each of its brands and averaged approximately four and a half weeks on hand compared to four weeks on hand at the end of the fourth quarter of 2023 and four and a half weeks at the end of the first quarter of 2023.

Net revenue per barrel. Net revenue per barrel increased by 3.0% to $267.55 per barrel for the thirteen weeks ended March 30, 2024, as compared to $259.73 per barrel for the comparable period in 2023, primarily due to price increases and lower returns.

Cost of goods sold. Cost of goods sold was $150.53 per barrel for the thirteen weeks ended March 30, 2024, as compared to $161.12 per barrel for the thirteen weeks ended April 1, 2023. The 2024 decrease in cost of goods sold of $10.59, or 5.8%, per barrel was primarily due to decreases in inventory obsolescence of $5.4 million, or $3.39 per barrel, raw materials pricing and recipe optimization of $5.3 million, or $3.33 per barrel, favorable product mix effects of $5.0 million, or $3.14 per barrel and the non-recurrence of 2023 contract settlement costs of $4.5 million, or $2.83 per barrel, partially offset by inflationary impacts of $5.2 million, or $3.27 per barrel.

Inflationary impacts of $5.2 million consist primarily of increased material costs of $3.6 million, and internal brewery costs of $1.6 million.

Gross profit. Gross profit was $117.02 per barrel for the thirteen weeks ended March 30, 2024, as compared to $98.61 per barrel for the thirteen weeks ended April 1, 2023.

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 $5.2 million, or 4.1%, to $120.3 million for the thirteen weeks ended March 30, 2024, as compared to $125.4 million for the thirteen weeks ended April 1, 2023, primarily due to decreased freight to distributors of $3.6 million from lower rates and improved freight efficiencies, partially offset by higher volumes. Brand investments decreased $1.6 million with decreases in other promotional activity partially offset by increases in media.

Advertising, promotional and selling expenses were 28.2% of net revenue, or $75.53 per barrel, for the thirteen weeks ended March 30, 2024, as compared to 30.6% of net revenue, or $79.46 per barrel, for the thirteen weeks ended April 1, 2023. This decrease per barrel is primarily due to advertising, promotional, and selling expenses decreasing at a higher rate than the increase in 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 $6.7 million, or 15.3%, to $50.4 million for the thirteen weeks ended March 30, 2024, as compared to $43.7 million for the thirteen weeks ended April 1, 2023, primarily due to higher salaries and benefits costs of $10.1 million, which includes an incremental $3.8 million of compensation costs mostly attributable to the Company's Chief Executive Officer transition, partially offset by decreased consulting costs of $3.7 million.

Impairment of brewery assets. Impairment of brewery assets of $0.3 million decreased by $0.1 million from the comparable period of 2023, due to lower write-offs of equipment at Company-owned breweries.

Income tax provision (benefit). The Company’s effective tax rate for the first quarter was a 33.0% provision compared to a 27.8% benefit in the prior year. The increase in the tax rate for the thirteen weeks ended March 30, 2024 as compared to the thirteen weeks ended April 1, 2023 is primarily due to the tax deficiency related to stock based compensation awards recorded on pre-tax income for the thirteen weeks ended March 30, 2024, compared to the tax deficiency related to stock based compensation awards on a pre-tax loss for the thirteen weeks ended April 1, 2023.

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 decreased to $205.4 million as of March 30, 2024 from $298.5 million as of December 30, 2023, primarily reflecting repurchases of the Company's Class A common stock, a note receivable issued, purchases of property, plant, and equipment, net cash used in operating activities, and payments of tax withholdings on stock-based payment awards and investment shares.

Cash used in operating activities consists of net income (loss), 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 used in operating activities for the thirteen weeks ended March 30, 2024 was comprised of net income of $12.6 million and non-cash items of $32.8 million, offset by net outflows for operating assets and liabilities of $50.3 million. Cash used in operating activities for the thirteen weeks ended April 1, 2023 was comprised of a net loss of $9.0 million and non-cash items of $27.7 million, offset by net outflows for operating assets and liabilities of $36.6 million. The decrease in cash used in operating activities for the thirteen weeks ended March 30, 2024 compared to April 1, 2023 is primarily due to higher net income and lower outflows arising from increases in accounts receivable, partially offset by greater outflows arising from increases in inventories.

The Company used $35.7 million in investing activities during the thirteen weeks ended March 30, 2024, as compared to $17.1 million during the thirteen weeks ended April 1, 2023. The increased in investing activity cash outflows is due to a $20.0 million note receivable issued, partially offset by lower capital investments. For both periods, capital investments were 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 $52.4 million during the thirteen weeks ended March 30, 2024, as compared to $23.1 million during the thirteen weeks ended April 1, 2023. The $29.4 million increase in financing activity cash outflows in 2023 compared to 2022 is primarily due to higher repurchases of the Company's Class A common stock in the current period.

During the period from December 31, 2023 through April 19, 2024, the Company repurchased and subsequently retired 199,811 shares of its Class A Common Stock for an aggregate purchase price of $65.0 million. As of April 19, 2024, the Company had repurchased a cumulative total of approximately 14.3 million shares of its Class A Common Stock for an aggregate purchase price of approximately $998.5 million and had approximately $201.5 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 March 30, 2024 of $205.4 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 March 30, 2024.

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 30, 2023.

Since December 30, 2023, 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 30, 2024, 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 March 30, 2024 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 30, 2024 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 30, 2023, 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.