Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended March 27, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS
(State or other jurisdiction of incorporation
or organization)
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04-3284048
(I.R.S. Employer
Identification No.) |
One Design Center Place, Suite 850, Boston, Massachusetts
(Address of principal executive offices)
02210
(Zip Code)
(617) 368-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files.
Yes o No
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Accelerated filer þ
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.) Yes o No þ
Number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2010:
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Class A Common Stock, $.01 par value
Class B Common Stock, $.01 par value
(Title of each class)
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9,901,143
4,107,355
(Number of shares) |
THE BOSTON BEER COMPANY, INC.
FORM 10-Q
QUARTERLY REPORT
MARCH 27, 2010
TABLE OF CONTENTS
2
PART I. Item 1. FINANCIAL INFORMATION
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 27, |
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December 26, |
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2010 |
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2009 |
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(unaudited) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
38,664 |
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$ |
55,481 |
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Accounts receivable, net of allowance for
doubtful accounts of $256 and $199 as of March
27, 2010 and December 26, 2009, respectively |
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24,471 |
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17,856 |
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Inventories |
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28,744 |
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25,558 |
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Prepaid expenses and other assets |
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10,182 |
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9,710 |
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Deferred income taxes |
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4,425 |
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4,425 |
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Total current assets |
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106,486 |
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113,030 |
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Property, plant and equipment, net |
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144,908 |
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147,021 |
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Other assets |
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1,486 |
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1,508 |
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Goodwill |
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1,377 |
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1,377 |
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Total assets |
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$ |
254,257 |
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$ |
262,936 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
19,217 |
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$ |
25,255 |
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Accrued expenses |
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49,661 |
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48,531 |
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Total current liabilities |
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68,878 |
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73,786 |
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Deferred income taxes |
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13,439 |
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13,439 |
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Other liabilities |
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3,823 |
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2,556 |
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Total liabilities |
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86,140 |
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89,781 |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Class A Common Stock, $.01 par value;
22,700,000 shares authorized; 9,967,491 and
10,142,494 shares issued and outstanding as of
March 27, 2010 and December 26, 2009,
respectively |
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100 |
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101 |
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Class B Common Stock, $.01 par value; 4,200,000
shares authorized; 4,107,355 shares issued and
outstanding |
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41 |
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41 |
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Additional paid-in capital |
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113,898 |
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111,668 |
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Accumulated other comprehensive loss, net of tax |
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(359 |
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(359 |
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Retained earnings |
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54,437 |
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61,704 |
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Total stockholders’ equity |
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168,117 |
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173,155 |
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Total liabilities and stockholders’ equity |
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$ |
254,257 |
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$ |
262,936 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three months ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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Revenue |
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$ |
102,470 |
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$ |
88,331 |
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Less excise taxes |
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8,440 |
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7,258 |
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Net revenue |
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94,030 |
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81,073 |
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Cost of goods sold |
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46,136 |
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43,028 |
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Gross profit |
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47,894 |
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38,045 |
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Operating expenses: |
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Advertising, promotional and selling expenses |
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29,137 |
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25,893 |
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General and administrative expenses |
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8,453 |
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8,807 |
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Impairments of long-lived assets |
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— |
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553 |
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Total operating expenses |
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37,590 |
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35,253 |
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Operating income |
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10,304 |
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2,792 |
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Other income (expense), net: |
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Interest income |
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2 |
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15 |
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Other expense, net |
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(1 |
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(21 |
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Total other income (expense), net |
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1 |
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(6 |
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Income before income taxes |
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10,305 |
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2,786 |
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Provision for income taxes |
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4,045 |
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1,420 |
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Net income |
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$ |
6,260 |
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$ |
1,366 |
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Net income per common share — basic |
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$ |
0.45 |
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$ |
0.10 |
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Net income per common share — diluted |
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$ |
0.44 |
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$ |
0.10 |
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Weighted-average number of common shares — basic |
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13,959 |
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14,078 |
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Weighted-average number of common shares — diluted |
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14,373 |
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14,305 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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Cash flows (used in) provided by operating activities: |
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Net income |
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$ |
6,260 |
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$ |
1,366 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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4,205 |
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4,197 |
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Impairments of long-lived assets |
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(2 |
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553 |
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Loss on disposal of property, plant and equipment |
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1 |
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— |
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Bad debt expense |
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57 |
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37 |
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Stock-based compensation |
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(121 |
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696 |
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Excess tax (benefit) deficit from stock-based compensation arrangements |
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(1,031 |
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33 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(6,672 |
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1,062 |
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Inventories |
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(3,186 |
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(4,721 |
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Prepaid expenses and other assets |
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(485 |
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2,575 |
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Accounts payable |
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(6,038 |
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2,133 |
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Accrued expenses |
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2,181 |
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(7,645 |
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Other liabilities |
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1,267 |
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(162 |
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Net cash (used in) provided by operating activities |
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(3,564 |
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124 |
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Cash flows used in investing activities: |
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Purchases of property, plant and equipment |
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(2,076 |
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(5,177 |
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Net cash used in investing activities |
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(2,076 |
) |
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(5,177 |
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Cash flows (used in) provided by financing activities: |
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Repurchase of Class A Common Stock |
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(13,530 |
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— |
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Proceeds from exercise of stock options |
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735 |
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43 |
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Excess tax benefit (deficit) from stock-based compensation arrangements |
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1,031 |
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(33 |
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Net proceeds from sale of investment shares |
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587 |
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114 |
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Net cash (used in) provided by financing activities |
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(11,177 |
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124 |
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Change in cash and cash equivalents |
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(16,817 |
) |
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(4,929 |
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Cash and cash equivalents at beginning of period |
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55,481 |
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9,074 |
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Cash and cash equivalents at end of period |
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$ |
38,664 |
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$ |
4,145 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
205 |
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$ |
19 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
The Boston Beer Company, Inc. and its subsidiaries (the “Company”) are engaged in the business of
selling low alcohol beverages throughout the United States and in selected international markets,
under the trade names, “The Boston Beer Company,” “Twisted Tea Brewing Company” and “HardCore Cider
Company.” The Company’s Samuel Adams® beer and Sam Adams Light® are produced and sold under the
trade name, “The Boston Beer Company.” The accompanying consolidated balance sheet as of March 27,
2010 and the statements of consolidated operations and consolidated cash flows for the interim
periods ended March 27, 2010 and March 28, 2009 have been prepared by the Company, without audit,
in accordance with U.S. generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required for complete financial statements
by generally accepted accounting principles and should be read in conjunction with the audited
financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 26, 2009.
Management’s Opinion
In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as
of March 27, 2010 and the results of its consolidated operations and consolidated cash flows for
the interim periods ended March 27, 2010 and March 28, 2009, reflect all adjustments (consisting
only of normal and recurring adjustments) necessary to present fairly the results of the interim
periods presented. The operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
B. Inventories
Inventories consist of raw materials, work in process and finished goods. Raw materials, which
principally consist of hops, other brewing materials and packaging, are stated at the lower of
cost, determined on the first-in, first-out basis, or market. The cost elements of work in process
and finished goods inventory consist of raw materials, direct labor and manufacturing overhead.
Inventories consist of the following:
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March 27, |
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December 26, |
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2010 |
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2009 |
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(in thousands) |
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Raw materials |
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$ |
19,781 |
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$ |
16,778 |
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Work in process |
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4,206 |
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4,884 |
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Finished goods |
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4,757 |
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3,896 |
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$ |
28,744 |
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$ |
25,558 |
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6
C. Net Income per Share
The following table sets forth the computation of basic and diluted net income per share:
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Three months ended |
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March 27, |
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March 28, |
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2010 |
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2009 |
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(in thousands, except per share data) |
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Net income |
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$ |
6,260 |
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$ |
1,366 |
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Weighted average shares of Class A Common Stock |
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9,852 |
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9,971 |
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Weighted average shares of Class B Common Stock |
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4,107 |
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4,107 |
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Shares used in net income per common share — basic |
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13,959 |
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14,078 |
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Effect of dilutive securities: |
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Stock options |
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385 |
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219 |
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Non-vested investment shares and restricted stock |
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29 |
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8 |
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Dilutive potential common shares |
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414 |
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227 |
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Shares used in net income per common share — diluted |
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14,373 |
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14,305 |
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Net income per common share — basic |
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$ |
0.45 |
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$ |
0.10 |
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Net income per common share — diluted |
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$ |
0.44 |
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$ |
0.10 |
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Basic net income per common share for each share of Class A Common Stock and Class B Common
Stock is $0.45 and $0.10 for the three months ended March 27, 2010 and March 28, 2009,
respectively, as each share of Class A and Class B participates equally in earnings. Shares of
Class B are convertible at any time into shares of Class A on a one-for-one basis at the option of
the stockholder.
Weighted-average options to purchase approximately 207,100 and 1,291,100 shares of Class A Common
Stock were outstanding as of March 27, 2010 and March 28, 2009, respectively, but not included in
computing diluted income per share because their effects were anti-dilutive. Additionally,
performance-based stock options to purchase 315,100 and 299,700 shares of Class A Common Stock were
outstanding as of March 27, 2010 and March 28, 2009, respectively, but not included in computing
dilutive income per share because the performance criteria of these stock options were not expected
to be met as of March 27, 2010 and March 28, 2009, respectively. Furthermore, performance-based
stock options to purchase 99,700 and 85,500 shares of Class A Common Stock were not included in computing dilutive income per
share because the performance criteria of these stock options were not met and the options were
cancelled during the three months ended March 27, 2010 and March 28, 2009, respectively.
Based on information available prior to the issuance of the Company’s financial statements for the
fiscal year ended December 26, 2009, the Compensation Committee of the Company’s Board of Directors
concluded that it was probable that the performance criteria under the option to purchase 120,000
shares granted to the Chief Executive Officer in 2005 would be met. The Company accordingly
recorded related compensation expense of approximately $0.9 million in the fourth quarter of 2009.
In late April 2010, the Compensation Committee, based upon updated information available through
April 23, 2010, concluded that one of the three applicable performance criteria had not been met.
As a result, the option has lapsed as to the 120,000 shares in question and, in the first quarter
of 2010, the Company reversed the related compensation expense of approximately $0.9 million.
D. Comprehensive Income or Loss
Comprehensive income or loss represents net income or loss, plus defined benefit plans liability
adjustments, net of tax effect. The defined benefit plans liability adjustments for the interim
periods ended March 27, 2010 and March 28, 2009 were not material.
7
E. Commitments and Contingencies
Purchase Commitments
The Company had outstanding non-cancelable purchase commitments related to advertising contracts
of approximately $10.2 million at March 27, 2010.
The Company has entered into contracts for the normal supply of a portion of its hops
requirements. These purchase contracts extend through crop year 2015 and specify both the
quantities and prices, mostly denominated in euros, to which the Company is committed. Hops
purchase commitments outstanding at March 27, 2010 totaled $29.9 million, based on the exchange
rates on that date.
In January 2009, the Company began sourcing glass bottles pursuant to a Glass Bottle Supply
Agreement with Anchor Glass Container Corporation (“Anchor”) under which Anchor became the
exclusive supplier of certain glass bottles for the Company’s breweries in Cincinnati, Ohio (the
“Cincinnati Brewery”) and Breinigsville, Pennsylvania (the “Pennsylvania Brewery”). This
agreement also establishes the terms on which Anchor may supply glass bottles to other breweries
where the Company brews its beers. Under the agreement with Anchor, the Company has minimum and
maximum purchase commitments that are based on Company-provided production estimates, which, under
normal business conditions, are expected to be fulfilled.
Currently, the Company brews more than 95% of its volume at Company owned breweries. In the normal
course of its business, the Company has historically entered into various production arrangements
with other brewing companies. Pursuant to these arrangements, the Company purchases the liquid
produced by those brewing companies, including the raw materials that are used in the liquid, at
the time such liquid goes into fermentation. The Company is required to repurchase all unused raw
materials purchased by the brewing company specifically for the Company’s beers at the brewing
company’s cost upon termination of the production arrangement. The Company is also obligated to
meet annual volume requirements in conjunction with certain production arrangements, which are not
material to the Company’s operations.
The Company had various other non-cancelable purchase commitments at March 27, 2010, which
amounted to $3.1 million.
Packaging Services Agreement
In connection with the
Company’s acquisition of the Pennsylvania Brewery, Diageo North America,
Inc. (“Diageo”) and the Company entered into a Packaging Services Agreement (the “Packaging
Services Agreement”), pursuant to which the Company agreed to blend and package the Diageo products
that were being produced at the Pennsylvania Brewery by Diageo. The Packaging Services Agreement
commenced on June 2, 2008, the date on which the Company purchased the Pennsylvania Brewery, and
called for a term of approximately two years, subject to certain early termination rights. In
November 2008, Diageo notified the Company of its intention to terminate the Packaging Service
Agreement and on May 2, 2009, the Packaging Services Agreement terminated. No early termination
penalties were applicable.
The Company recorded $3.6 million in revenue under the Packaging Services Agreement during the
quarter ended March 28, 2009, based upon units produced.
Freetown Land
The Company owns land in Freetown, Massachusetts that it had purchased for approximately $6.0
million in 2007 and subsequently placed on the market in February 2008. In the fourth quarter of
2009, the Company reduced the carrying values of the land, primarily reflecting the effect of the
general decline in economic conditions. While the Company has not classified this asset as held
for sale in its accompanying balance sheet, the Company continues to actively market the land for
amounts in excess of its carrying value. The future realization of the asset is dependent on the
future cash flows associated with either the sale or use of this asset. The Company continues to
monitor this asset for any potential additional impairment of value.
8
Litigation
The Company is considering pursuing a claim against the manufacturer of the glass bottles that were
subject to a product recall in 2008. While the Company is not aware of any basis for a claim or
counter-claim against it by the manufacturer in connection with this matter, such a possibility
exists. In such event, there is the risk that the recovery by the manufacturer on its claims could
exceed the Company’s recovery on its claims. In addition, when
formal proceedings are initiated, substantial legal and related costs are possible, which, if not
recovered, could have a materially adverse impact on the Company’s financial results. At this
time, since no formal claim has been made, it is not possible to assess the risk of a successful
counter-claim or the probable cost of such litigation.
In 2009, the Company was informed that ownership of the High Falls brewery located in Rochester,
New York (the “Rochester Brewery”) changed and that the new owners would not assume the Company’s
existing contract for brewing services at the Rochester Brewery. Brewing of the Company’s
products at the Rochester Brewery ceased in April 2009, pending resolution of the contract issues.
Although the new owners indicated a willingness to negotiate a new production arrangement, the
parties were unable to reach an agreement and the new owners withdrew their proposals. As a
result, in February 2010, the Company filed a Demand for Arbitration with the American Arbitration
Association (the “arbitration”), naming the new and previous owners of the Rochester Brewery,
asserting, among other things, breach of contract and wrongful interference with contract. On
March 1, 2010, the new and previous owners of the Rochester Brewery filed a complaint in federal
court seeking a declaratory judgment and injunction to require certain of the Company’s claims to
proceed in court, rather than in the arbitration. On April 8, 2010, the Company filed an answer
to that complaint. No prediction of the likely outcome of that litigation can be made at this
time. The Company does not believe that its inability to avail itself of production capacity at
the Rochester Brewery will, in the near future, have a material impact on its ability to meet
demand for its products.
F. Income Taxes
As of March 27, 2010 and December 26, 2009, the Company had approximately $6.5 million and $6.6
million, respectively, of unrecognized income tax benefits. A decrease of $0.1 million in
unrecognized tax benefits was recorded for the three months ended March 27, 2010.
The Company’s practice is to classify interest and penalties related to income tax matters in
income tax expense. As of March 27, 2010 and December 26, 2009, the Company had $2.9 million and
$2.7 million, respectively, accrued for interest and penalties.
The Company’s state income tax returns remain subject to examination for three or four years
depending on a particular state’s statute of limitations. In addition, the Company is generally
obligated to report changes in taxable income arising from federal income tax audits.
In August 2008, the Massachusetts Department of Revenue (“MA DOR”) commenced an examination of the
Company’s 2004, 2005 and 2006 corporate income tax returns. In addition, in October 2009, the MA
DOR expanded the original examination to include the 2007 and 2008 corporate income tax returns.
At March 27, 2010, the examination was in progress. The Company is also being audited by three
other states as of March 27, 2010.
In July 2009, the Internal Revenue Service commenced an examination of the Company’s 2008
consolidated corporate income tax return and the related loss carry back claim to 2006. At March
27, 2010, the examination was in progress.
It is reasonably possible that the Company’s unrecognized tax benefits may increase or decrease
significantly in 2010 due to the commencement or completion of income tax audits. However, the
Company cannot estimate the range of such possible changes. The Company does not expect that any
potential changes would have a material impact on the Company’s financial position, results of
operations, or cash flows.
G. Product Recall
On April 7, 2008, the Company announced a voluntary product recall of certain glass bottles of its
Samuel Adams® products. The recall was a precautionary step and resulted from routine quality
control inspections at the Cincinnati Brewery, which detected glass inclusions in certain bottles
of beer. The bottles were from a single glass plant that supplied bottles to the Company. The
glass plant in question supplied approximately 25% of the Company’s glass bottles during the first
quarter of 2008.
9
The recall process was substantially completed during the fourth quarter of 2008, and the Company
made no material changes in its estimate of overall recall costs during the first quarter of 2010.
The following table summarizes the Company’s reserves and reserve activities for the product recall
for the three months ended March 27, 2010 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reserves at |
|
|
|
|
|
|
|
|
|
|
Reserves at |
|
| |
|
December 26, |
|
|
Changes in |
|
|
Reserves |
|
|
March 27, |
|
| |
|
2009 |
|
|
Estimates |
|
|
Used |
|
|
2010 |
|
| |
Product returns |
|
$ |
— |
|
|
$ |
13 |
|
|
$ |
(13 |
) |
|
$ |
— |
|
Excise tax credit |
|
|
(158 |
) |
|
|
— |
|
|
|
— |
|
|
|
(158 |
) |
Recall-related costs |
|
|
255 |
|
|
|
— |
|
|
|
— |
|
|
|
255 |
|
Inventory reserves |
|
|
2,421 |
|
|
|
— |
|
|
|
— |
|
|
|
2,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,518 |
|
|
$ |
13 |
|
|
$ |
(13 |
) |
|
$ |
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company currently believes it may have claims against the supplier of these glass bottles for
the impact of the recall, but it is impossible to predict the outcome of such potential claims.
Consequently, no amounts have been recorded as receivable as of March 27, 2010 for any potential
recoveries from third parties and there can be no assurance there will be any recoveries. The
Company carries product liability insurance, but does not carry product recall insurance.
H. Line of Credit
The Company has a credit facility in place that provides for a $50.0 million revolving line of
credit which expires on March 31, 2013. As of March 27, 2010, there were no borrowings outstanding
and the line of credit was fully available to the Company for borrowing. The Company was not in
violation of any of its covenants to the lender under the credit facility.
I. Fair Value of Financial Instruments
The Company determines the fair value of its financial assets and liabilities in accordance with
ASC Topic 820. The Company believes that the carrying amount of its cash, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the short-term nature of these
assets and liabilities. The Company is not exposed to significant interest, currency or credit
risks arising from these financial assets and liabilities.
J. Subsequent Events
The Company evaluated subsequent events occurring after the balance sheet date, March 27, 2010,
and, with the exception of the reversal of stock compensation expense
discussed in Note C, concluded that there were no other events of which management was aware that occurred after the
balance sheet date that would require any adjustment to the accompanying consolidated financial
statements.
10
PART I. Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the significant factors affecting the consolidated operating
results, financial condition and liquidity and cash flows of The Boston Beer Company, Inc. (the
“Company” or “Boston Beer”) for the three-month period ended March 27, 2010, as compared to the
three-month period ended March 28, 2009. 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 26, 2009.
RESULTS OF OPERATIONS
Boston Beer’s flagship product is Samuel Adams Boston
Lagerâ. For purposes of this
discussion, Boston Beer’s “core brands” include all products
sold under the Samuel Adamsâ,
Sam
Adamsâ, Twisted Teaâ and
HardCoreâ trademarks. “Core brands” do not include
the products brewed or packaged at the
Company’s breweries in Cincinnati, Ohio (the “Cincinnati
Brewery”) and Breinigsville, Pennsylvania (the “Pennsylvania Brewery”) under contract arrangements
for third parties that are not significant to the Company’s total sales in 2010 and 2009.
Three Months Ended March 27, 2010 compared to Three Months Ended March 28, 2009
Net revenue. Net revenue increased by $12.9 million, or 15.9%, to $94.0 million for the three
months ended March 27, 2010, as compared to $81.1 million for the three months ended March 28,
2009, due to increases in core shipments of 18.8% and core pricing increases of approximately 1.8%,
partially offset by a reduction in non-core revenue of $3.6 million due to the termination of the
2008 Packaging Services Agreement with Diageo North America in May 2009.
Volume. Total shipment volume decreased by 11.1% to 457,000 barrels for the three months ended
March 27, 2010, as compared to 514,000 barrels for the three months ended March 28, 2009. Shipment
volume for the core brands increased by 18.8% to 454,000 barrels, due primarily to double-digit
increases in Samuel Adams® Seasonals, Twisted Tea® and Samuel Adams Boston Lager®.
Shipments and orders in-hand suggest that year-to-date core shipments through May 2010 will
be up approximately 14% compared to the same period in 2009. Actual shipments may differ,
however, and no inferences should be drawn with respect to shipments in future periods.
Depletions, or sales by the wholesalers to retailers, of the Company’s core brands for the first
quarter of 2010 increased by approximately 13.5% versus the same period in 2009, driven by
double-digit increases in Samuel Adams® Seasonals, due to the introduction of Samuel Adams® Noble
Pils, and Twisted Tea®, as well as high single-digit growth in Samuel Adams Boston Lager®. The
Company believes that wholesaler inventory levels at March 27, 2010 were at appropriate levels.
Year-to-date depletions through
April 2010 are estimated by the Company to be up approximately 14%
from the same period in 2009. The Company believes this comparison benefited from the weak
depletions in the comparable 2009 period, strong wholesaler and sales force execution in the first
four months of 2010, and the introduction of Samuel Adams® Noble Pils in 2010. These depletions
trends may not be indicative of prospects for the balance of the year, where the future comparisons
are more difficult and no major new product introductions are currently planned.
Net Selling Price. The net selling price per barrel increased by 30.4% to $205.75 for the three
months ended March 27, 2010, as compared to $157.73 for the same period last year, due primarily to
the termination of the 2008 Packaging Services Agreement with Diageo North America in May 2009, as
the products generated low revenue per barrel. The selling price per barrel for core brands
increased by 2.5% to $206.48 for the three months ended March 27, 2010, as compared to $201.52 for
the same period last year. This increase in net revenue per barrel for core brands is primarily
due to price increases of 1.8%.
11
Gross profit. Gross profit per barrel increased to $104.80 per barrel for the three months ended
March 27, 2010, as compared to $74.02 for the three months ended March 28, 2009. Gross profit per
barrel for core brands was $105.19 per barrel for the three months ended March 27, 2010, as
compared to $100.25 for the three months ended March 28, 2009. Gross margin for core products was
51% for the three months ended March 27, 2010, as compared to 50% for the three months ended March
28, 2009. The increase in gross profit per core barrel of $4.94 and gross margin of 1 percentage
point is primarily due to increases in the net selling price per barrel.
Cost of goods sold for core brands was $101.29 per barrel for the three months ended March 27,
2010, as compared to $101.27 per barrel for the three months ended March 28, 2009. The slight
change in costs of goods sold of $0.02 per barrel resulted from favorable product mix, partially
offset by a shift in production from kegs to cases.
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 the reported
margins of other entities that classify costs related to distribution differently.
Advertising, promotional and selling. Advertising, promotional and selling expenses increased by
$3.2 million, or 12.4%, to $29.1 million for the three months ended March 27, 2010, as compared to
$25.9 million for the three months ended March 28, 2009. The increase is primarily a result of
increased investments in advertising and increases in salary and benefit costs related to the
addition of sales personnel. Advertising, promotional and selling expenses for core brands were
31% of net revenue, or $64.18 per barrel, for the three months ended March 27, 2010, as compared to
34% of net revenue, or $67.78 per barrel, for the three months ended March 28, 2009. The decreases
in advertising, promotional and selling expenses per barrel and as a percentage of net revenue are
due to core shipment volume increasing at a higher rate than increases in advertising, promotion
and selling expenses. The Company will invest in advertising and promotional campaigns that it
believes are effective, but there is no guarantee that such investment will generate sales growth.
The Company conducts certain advertising and promotional activities in the wholesalers’ markets,
and the wholesalers make contributions to the Company for such efforts. These amounts are included
in the Company’s statement of operations as reductions to advertising, promotional and selling
expenses. Historically, contributions from wholesalers for advertising and promotional activities
have amounted to between 2% and 4% of net sales. The Company may adjust its promotional efforts in
the wholesalers’ markets if changes occur in these promotional contribution arrangements, depending
on the industry and market conditions.
General and administrative. General and administrative expenses decreased by $0.3 million, or
3.4%, to $8.5 million for the three months ended March 27, 2010, as compared to $8.8 million for
the same period last year. The decrease is primarily the result of the reversal of stock
compensation expense for an option that did not vest that was only partially offset by increases in salaries and benefits
and legal fees.
Impairment of long-lived assets. The Company did not incur any impairment charges during the
three months ended March 27, 2010. During the three months ended March 28, 2009, the Company
incurred impairment charges of $0.6 million for assets at the Pennsylvania Brewery, resulting from
the replacement of equipment that was not yet fully depreciated in order to improve the
efficiencies of the brewery.
Total other income (expense), net. Total other income, net, was $1,000 for the three months ended
March 27, 2010, as compared to $6,000 of total other expense, net, for the three months ended March
28, 2009.
Provision for income taxes. The Company recorded an income tax provision of $4.0 million for the
three months ended March 27, 2010, compared to $1.4 million for the three months ended March 28,
2009. The Company’s effective tax rate for the first quarter of 2010 decreased to 39% from the
first quarter 2009 rate of 51% as a result of higher pretax income but with no corresponding
increase in nondeductible expenses. The Company has reduced its expected full year tax rate from
42% to 40%.
12
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $38.7 million as of March 27, 2010 from $55.5 million as of December 26, 2009,
primarily due to an increase in cash used in financing activities, resulting from an increase in
stock repurchases, as well as an increase in cash used in operating activities.
Cash flows used in or provided by operating activities consist of net income or net loss, adjusted
for certain non-cash items, such as depreciation and amortization, stock-based compensation
expense and related excess tax benefit, and other non-cash items included in operating results.
Also affecting cash flows used in or provided by operating activities are changes in operating
assets and liabilities, such as accounts receivable, inventory, accounts payable and accrued
expenses.
Cash flows used in operating activities was $3.6 million for the three months ended March 27, 2010,
compared to cash flows provided by operating activities of $0.1 million for the same period in the
prior year. Operating cash flows were negatively impacted by changes in working capital, primarily
due to a $6.7 million change in Accounts Receivable caused by increased shipments during the second
half of the month of March compared to prior periods. Other significant changes in working capital
are a decrease in Accounts Payable of $6.0 million, due to timing of invoices primarily related to
capital projects, and an increase in inventory of $3.2 million due to normal seasonal inventory
requirements.
The Company used $2.1 million in investing activities during the three months ended March 27,
2010, as compared to $5.2 million during the three months ended March 28, 2009. Investing
activities primarily consisted of equipment purchases to upgrade the Company-owned breweries.
Cash used in financing activities was $11.2 million during the three months ended March 27, 2010,
as compared to $0.1 million of cash provided by financing activities during the three months ended
March 28, 2009. The $11.3 million change in financing cash flow is primarily due to an increase in
stock repurchases under the Company’s Stock Repurchase Program.
During the three months ended
March 27, 2010, the Company repurchased approximately 0.3 million
shares of its Class A Common Stock for an aggregate purchase price of $13.5 million.
On March 4, 2010, the Board of Directors of the Company increased the aggregate expenditure limit for the
Company’s Stock Repurchase Program by $25.0 million, thereby increasing the limit from $140.0
million to $165.0 million. As of March 27, 2010, the Company repurchased a cumulative total of
approximately 9.0 million shares of its Class A Common Stock for an aggregate purchase price of
$134.6 million and had approximately $30.4 million remaining on the share buyback expenditure
limit. From March 28, 2010 through April 30, 2010, the Company repurchased an additional 84,400
shares of its Class A Common Stock for a total cost of $4.5 million. Through April 30, 2010, the
Company has repurchased a cumulative total of approximately 9.0 million shares of its Class A
Common Stock for an aggregate purchase price of $139.1 million, and had approximately $25.9 million
remaining on the $165.0 million share buyback expenditure limit set by the Board of Directors.
The Company expects that its cash
balance as of March 27, 2010 of $38.7 million, along with future
operating cash flow and the Company’s unused line of credit of $50.0 million, will be sufficient to
fund future cash requirements. The Company’s $50.0 million credit facility has a term not
scheduled to expire until March 31, 2013. The Company was not in violation of any of its covenants
to the lender under the credit facility and there were no amounts outstanding under the credit
facility as of the date of this filing.
2010 Outlook
Based on information of which the Company is currently aware, the Company is increasing its
projected 2010 earnings per diluted share from a range of $2.35 to $2.65 to a range of $2.65 to
$2.95, based on strong first quarter results, an improved business outlook, a lower projected full
year tax rate and the impact of share repurchases to date; however, actual results could vary
significantly from this target. The Company currently projects full year depletions growth of
between 6% and 8%, based on its analysis of year-to-date depletions versus 2009 and 2008. The
Company continues to believe that the current competitive pricing environment is very challenging
and continues to project increases of between 1% and 2% through minor price optimizations, as the
competitive
environment permits, but there can be no assurances that the Company will be able to achieve the
planned revenue per barrel increases. The Company continues to forecast cost stability for
packaging and ingredients and currently believes that full year 2010 gross margins will be
approximately 54%. The Company is committed to trying to grow market share and to maintain volume
and healthy pricing, and is prepared to invest to accomplish this, even if this causes short term
earnings decreases.
13
The Company continues to evaluate 2010 capital expenditures and, based on current information, now
expects them to be between $10.0 million and $20.0 million, most of which relate to continued
investments in the Pennsylvania Brewery, as the Company pursues further efficiency initiatives and
equipment upgrades. The actual amount spent may well be different from these estimates as the
Company continues to analyze its investment opportunities. In addition, higher volumes than
currently expected could require additional keg purchases that are not included in these
estimates.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance Sheet Arrangements
At March 27, 2010, the Company did not have off-balance sheet arrangements as defined in
03(a)(4)(ii) of Regulation S-K.
Contractual Obligations
There were no material changes outside of the ordinary course of the Company’s business to
contractual obligations during the three month period ended March 27, 2010.
Critical Accounting Policies
There were no material changes to the Company’s critical accounting policies during the three month
period ended March 27, 2010.
Recent Accounting Pronouncements
In January 2010,
the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, Fair Value Measurements
and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (“ASU No.
2010-06”). ASU No. 2010-06 requires new disclosures for transfers in and out of Level 1 and 2 fair
value measurements and activity in Level 3 fair value measurements. ASU No. 2010-06 also clarifies
existing disclosures for level of disaggregation and about inputs and valuation techniques. The
new disclosures are effective for interim and annual periods beginning after December 15, 2009,
except for the Level 3 disclosures, which are effective for fiscal years beginning after December
15, 2010 and for interim periods within those years.
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 “Other Risks and Uncertainties” in
the Company’s Annual Report on Form 10-K for the year ended December 26, 2009.
14
|
|
|
| Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Since December 26, 2009, 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.
|
|
|
| Item 4. |
|
CONTROLS AND PROCEDURES |
As of March 27, 2010, 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), of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures as defined in Rule 13a-15 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 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 was no change in the Company’s internal control over financial reporting that occurred
during the quarter ended March 27, 2010 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
|
|
|
| Item 1. |
|
LEGAL PROCEEDINGS |
In 2009, the Company was informed that ownership of the High Falls brewery located in Rochester,
New York (the “Rochester Brewery”) changed and that the new owners would not assume the Company’s
existing contract for brewing services at the Rochester Brewery. Brewing of the Company’s
products at the Rochester Brewery ceased in April 2009, pending resolution of the contract issues.
Although the new owners indicated a willingness to negotiate a new production arrangement, the
parties were unable to reach an agreement and the new owners withdrew their proposals. In
February 2010, the Company filed a Demand for Arbitration with the American Arbitration
Association (the “arbitration”), naming the new and previous owners of the Rochester Brewery,
asserting, among other things, breach of contract and wrongful interference with contract. On
March 1, 2010, the new and previous owners of the Rochester Brewery filed a complaint in federal
court seeking a declaratory judgment and injunction to require certain of the Company’s claims to
proceed in court, rather than in the arbitration. On April 8, 2010, the Company filed an answer
to that complaint. No prediction of the likely outcome of that litigation can be made at this
time.
The Company is currently not a party to any pending or threatened litigation, the outcome of which
would be expected to have a material adverse effect on its financial condition or the results of
its operations.
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 26, 2009, 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.
15
|
|
|
| Item 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On March 4, 2010, the Board of Directors of the Company increased the aggregate expenditure limit
for the Company’s Stock Repurchase Program by $25.0 million, thereby increasing the limit from
$140.0 million to $165.0 million. As of March 27, 2010, the Company has repurchased a cumulative
total of approximately 9.0 million shares of its Class A Common Stock for an aggregate purchase
price of $134.6 million. As of March 27, 2010, the Company had approximately $30.4 million
remaining on the $165.0 million share buyback expenditure limit.
During the three months ended March 27, 2010, the Company repurchased 287,548 shares of its Class A
Common Stock as illustrated in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
| |
|
Total |
|
|
|
|
|
|
Shares Purchased as |
|
|
Value of Shares that |
|
| |
|
Number of |
|
|
Average |
|
|
Part of Publicly |
|
|
May Yet be Purchased |
|
| |
|
Shares |
|
|
Price Paid |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
| Period |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2009 to January 30, 2010 |
|
|
133,548 |
|
|
$ |
47.30 |
|
|
|
133,428 |
|
|
$ |
12,594,608 |
|
January 31, 2010 to February 27, 2010 |
|
|
133,000 |
|
|
|
46.47 |
|
|
|
133,000 |
|
|
|
6,413,524 |
|
February 28, 2010 to March 27, 2010 |
|
|
21,000 |
|
|
|
49.27 |
|
|
|
21,000 |
|
|
|
30,378,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
287,548 |
|
|
$ |
47.06 |
|
|
|
287,428 |
|
|
$ |
30,378,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the shares that were purchased during the period, 120 shares represent repurchases of unvested
investment shares issued under the Investment Share Program of the Company’s Employee Equity
Incentive Plan.
As of April 30, 2010, the Company has repurchased a cumulative total of approximately 9.0 million
shares of its Class A Common Stock for an aggregate purchase price of $139.1 million and had
approximately $25.9 million remaining on the $165.0 million share buyback expenditure limit.
As of April 30, 2010, the Company
had 9.9 million shares of Class A Common Stock outstanding and
4.1 million shares of Class B Common Stock outstanding.
|
|
|
| Item 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
Not Applicable
|
|
|
| Item 4. |
|
REMOVED AND RESERVED |
|
|
|
| Item 5. |
|
OTHER INFORMATION |
Not Applicable
16
| |
|
|
|
|
| Exhibit No. |
|
Title |
| |
| |
11.1 |
|
|
The information required by Exhibit 11 has been included
in Note C of the notes to the consolidated financial statements. |
| |
|
|
|
|
| |
*31.1 |
|
|
Certification of the President and Chief Executive
Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
*31.2 |
|
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
*32.1 |
|
|
Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
*32.2 |
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
THE BOSTON BEER COMPANY, INC.
(Registrant)
| |
|
|
|
|
Date: May 5, 2010
|
|
/s/ Martin F. Roper
Martin F. Roper
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
(principal executive officer) |
|
|
|
|
|
|
|
Date: May 5, 2010
|
|
/s/ William F. Urich
William F. Urich
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
(principal accounting and financial officer) |
|
|
18