UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended September 28, 2002
OR
For the transition period from to
Commission file number: 1-14092
THE BOSTON BEER COMPANY, INC.
75 Arlington Street, Boston, Massachusetts(Address of principal executive offices)02116(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.
Number of shares outstanding of each of the issuer’s classes of common stock, as of November 8, 2002:
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TABLE OF CONTENTS
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIESFORM 10-Q
QUARTERLY REPORTSEPTEMBER 28, 2002
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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share data)(unaudited)
The accompanying notes are an integral part of these consolidated financial statements
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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(unaudited)
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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The Boston Beer Company, Inc. and its subsidiaries (the “Company”) is engaged in the business of brewing and selling malt beverages and cider products throughout the United States and in selected international markets. The accompanying consolidated statement of financial position as of September 28, 2002 and the statement of consolidated operations and consolidated cash flows for the quarters ended September 28, 2002 and September 29, 2001 have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America 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 29, 2001.
Management’s Opinion
B. SHORT-TERM INVESTMENTS
Short-term investments held by the Company as of September 28, 2002 were classified as available-for-sale and held-to-maturity, depending upon the nature of the investment. Available-for-sale investments include mutual bond funds comprised of taxable and tax-advantaged securities. The cost of available-for-sale investments were $31.1 million and $0, as of September 28, 2002 and December 29, 2001, respectively. Available-for-sale securities are recorded at fair market value, with the change in fair market value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. Held-to-maturity investments consisted of debt securities, which typically mature in one year or less and are valued at amortized cost, which approximates fair value. The Company has the positive intent and ability to hold these securities until maturity. The aggregate fair value of held-to-maturity securities at September 28, 2002 and December 29, 2001 was $0 and $2.0 million, respectively.
The Company recorded unrealized gains of approximately $535,000 and $0 on available-for-sale securities as of September 28, 2002 and December 29, 2001, respectively. The Company also recorded realized gains of approximately $21,000 and $0 during the period ended September 28, 2002 and September 29, 2001.
C. INVENTORIES
Inventories, which consist principally of hops, brewery materials and packaging, are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market.
Inventories consist of the following (in thousands):
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D. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standard No. 128 (in thousands, except per share data):
E. COMPREHENSIVE INCOME
Comprehensive income calculated in accordance with Statement of Financial Accounting Standard No. 130 is as follows (in thousands):
Accumulated other comprehensive income calculated in accordance with Statement of Financial Accounting Standard No. 130 is as follows (in thousands):
F. GOODWILL
Effective January 1, 2002 the Company adopted Financial Accounting Standards Board Statements of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and other Intangible Assets. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead tested for impairment at least annually.
SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment; while the second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. The Company completed its first phase impairment analysis during the second quarter 2002 and found
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no instances of impairment of its recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.
The Company recorded approximately $25,000 and $75,000 of goodwill amortization during the three and nine months ended September 29, 2001, respectively. In accordance with SFAS No. 142, the Company recorded no amortization related to goodwill during 2002. The pro-forma effect of goodwill amortization is not deemed to be material.
G. RECENT ACCOUNTING PROUNOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company expects that the initial application of SFAS No. 143 will not have a material impact on its financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company for all financial statements issued in fiscal 2003. The Company expects that the initial application of SFAS No. 144 will not have a material impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections”. One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company believes that the adoption of SFAS No. 145 will not have a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Cost Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on its financial statements.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company for the three and nine-month periods ended September 28, 2002 as compared to the three and nine-month periods ended September 29, 2001. This discussion should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements of the Company and Notes thereto included in the Form 10-K for the fiscal year ended December 29, 2001.
RESULTS OF OPERATIONS
For purposes of this discussion, Boston Beer’s “core brands” include all products sold under the Samuel Adams®, Sam Adams Light®, Oregon Original™, HardCore® and Twisted Tea® trademarks. “Core brands” do not include the products brewed at the Cincinnati Brewery under contract arrangements for third parties. Volume produced under contract arrangements is referred to below as “non-core products”. Boston Beer’s flagship product is Samuel Adams Boston Lager®.
Three Months Ended September 28, 2002 compared to Three Months Ended September 29, 2001
Net sales. Net sales increased by $7.5 million or 15.2% to $56.6 million for the three months ended September 28, 2002 from $49.1 million for the three months ended September 29, 2001. The increase is primarily due to an increase in volume of Boston Beer’s core brands and an increase in weighted average price.
Volume. Total volume increased by 11.6% to 336,000 barrels in the three months ended September 28, 2002 from 301,000 barrels in the three months ended September 29, 2001. Core brands increased by 11.7% to 335,000 barrels for the quarter ended September 28, 2002, from 299,000 barrels for the quarter ended September 29, 2001. The increase in core brands is primarily due to volume contributed from Sam Adams Light®. Sam Adams Light® was initially launched in certain test markets during the second half of 2001. As of September 2002, Sam Adams Light® had been introduced in markets which represented over 85% of the Company’s business. The Company plans to have completed its national roll-out by year-end.
Selling Price. The selling price per barrel increased approximately 3.2% to $168.33 per barrel for the quarter ended September 28, 2002. This increase is due to changes in the packaging mix and normal price increases. The ratio of bottles to kegs increased, with bottles representing 74.4% of total shipments in the three months ended September 28, 2002 as compared to 70.5% for the same period last year. The shift in the mix to bottles from kegs increased revenue per barrel, as the selling price per equivalent barrel is higher for bottles than for kegs. This shift is primarily due to the introduction of Sam Adams Light®, as this product is only available in bottles.
Gross Profit. Gross profit was 58.3% as a percentage of net sales or $98.18 per barrel for the quarter ended September 28, 2002, as compared to 58.5% and $95.38 for the quarter ended September 29, 2001. The increase per barrel was primarily due to packaging mix changes, selling price increases, offset by an increase in cost of goods sold.
Cost of sales increased by $2.39 per barrel to 41.7% as a percentage of net sales or $70.15 per barrel for the quarter ended September 28, 2002, as compared to 41.5% as a percentage of net sales or $67.76 per barrel for the quarter ended September 29, 2001. This is primarily due to packaging mix changes and increases in costs of packaging, glass, and contracting fees.
Advertising, Promotional and Selling. As a percentage of net sales, advertising, promotional and selling expenses were 51.9% for the quarter ended September 28, 2002, as compared to 43.1% for the quarter ended September 29, 2001. Advertising, promotional and selling expenses increased by $8.2 million or 38.7% to $29.4 million for the three months ended September 28, 2002, compared to $21.2 million for the three months ended September 29, 2001. This increase is primarily due to the significant investment in brand support for the launch of Sam Adams Light®. The Company plans to continue its roll-out of Sam Adams Light® during the fourth quarter 2002 with similar high investment levels in brand support.
General and Administrative. General and administrative expenses increased by 8.8% or $276,000 to $3.4 million for the quarter ended September 28, 2002 as compared to the same period last year, primarily due to increases in employee-related costs, rent, and insurance premiums.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (continued)
Interest income, net. Interest income decreased by 12.8% to $334,000 for the quarter ended September 28, 2002 from $383,000 for the quarter ended September 28, 2001. This decrease is primarily due to a change in investment allocation and declines in interest rates during the quarter ended September 28, 2002, as compared to the same period last year.
Provision for income taxes. The Company’s effective tax rate decreased to 36.9% for the three months ended September 28, 2002 from 42.3% for the same period last year. This decline is due to the restructuring of certain entities that was completed during the second quarter 2002. The Company anticipates that its effective tax rate for the full year will be approximately the 41% rate recorded for the year ended December 29, 2001.
Nine Months Ended September 28, 2002 compared to Nine Months Ended September 29, 2001
Net sales. Net sales increased by $21.7 million or 15.5% to $161.1 million for the nine months ended September 28, 2002 from $139.4 million for the nine months ended September 29, 2001. The increase is primarily due to an increase in volume of Boston Beer’s core brands coupled with increases in selling prices.
Volume. Total volume increased by 10.1% to 964,000 barrels in the nine months ended September 28, 2002 from 875,000 barrels in the nine months ended September 29, 2001. Core brands increased by 12.9% to 959,000 barrels for the nine months ended September 28, 2002 as compared to the same period last year. The increase in core brands is primarily due to volume contributed from Sam Adams Light®. Sam Adams Light® was initially launched in certain test markets during the second half of 2001. By the end of the nine months ended September 28, 2002, the Company had launched the new product into markets representing over 85% of the Company’s total volume. The Company plans to have completed its national launch by year-end.
Non-core volume decreased by 82.1% to 5,000 barrels for the nine months ended September 28, 2002 from 26,000 barrels for the nine months ended September 29, 2001. As gross profit is significantly lower on non-core products as compared to core brands, the Company does not believe that this change will have a material impact on its financial position, results of operations or cash flows in the short or long-term.
Selling Price. The selling price per barrel increased approximately 4.9% to $167.11 per barrel for the nine months ended September 28, 2002. This increase is due to a decline in non-core volume, changes in packaging mix, and price increases. As net selling price is significantly lower for non-core products as compared to core brands, the decline in non-core products effectively increased the combined net selling price per equivalent barrel. The ratio of bottles to kegs increased, with bottles representing 72.5% of total shipments in the nine months ended September 28, 2002 as compared to 68.8% for the same period last year. The shift in the mix to bottles from kegs effectively increased revenue per barrel, as the selling price per equivalent barrel is higher for bottles than for kegs. This shift is primarily due to the introduction of Sam Adams Light®, as this product is only available in bottles.
Gross Profit. Gross profit was 59.4% as a percentage of net sales or $99.21 per barrel for the nine months ended September 28, 2002, as compared to 58.9% and $93.89 for the nine months ended September 29, 2001. The increase was primarily due to a decline in non-core products, packaging mix changes and price increases, offset by an increase in cost of goods sold.
Cost of sales increased by $2.45 per barrel to 40.6% as a percentage of net sales or $67.89 per barrel for the nine months ended September 28, 2002, as compared to 41.1% as a percentage of net sales or $65.44 per barrel for the nine months ended September 29, 2001. The increase per barrel is primarily due to packaging mix changes and increases in costs of packaging, glass, and contracting fees.
Advertising, Promotional and Selling. As a percentage of net sales, advertising, promotional and selling expenses were 47.0% for the nine months ended September 28, 2002, as compared to 39.3% for the nine months ended September 29, 2001. Advertising, promotional and selling expenses increased by $20.9 million or 38.2% to $75.6 million for the nine months ended September 28, 2002, compared to $54.7 million for the nine months ended September 29, 2001. This increase is primarily due to the investment in brand support for the launch of Sam Adams Light®. The Company plans to continue its roll-out of Sam Adams Light® during the fourth quarter 2002 with similar high investment levels in brand support.
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General and Administrative. General and administrative expenses increased by 7.9% or $787,000 to $10.7 million for the nine months ended September 28, 2002 as compared to the same period last year, primarily due to increases in employee-related costs, rent, and insurance premiums.
Interest income, net. Interest income decreased by 39.7% to $731,000 for the nine months ended September 28, 2002 from $1.2 million for the nine months ended September 28, 2001. This decrease is primarily due to a change in investment allocation and declines in interest rates during the nine months ended September 28, 2002, as compared to the same period last year.
Other income. Other income increased by $969,000 to $1.0 million for the nine months ended September 28, 2002 from $70,000 for the nine months ended September 29, 2001. During the second quarter 2002, the Company received shares of stock from the demutualization of a third party insurance provider. The Company recorded the value of this stock receipt of $1.3 million in the nine months ended September 28, 2002. This gain was partially offset by losses relating to the disposal of assets.
LIQUIDITY AND CAPITAL RESOURCES
The company’s financial condition continued to be strong during the nine months of 2002. Cash and short-term investments increased to $49.1 million as of September 28, 2002 from $47.9 million as of December 29, 2001. For the nine months ended September 28, 2002, cash (excluding short-term investments) provided by operating activities of $11.6 million was partially offset by cash used in financing activities of $9.5 million. Cash provided by operating activities during the first nine months of 2002 was lower than operating cash flow for the same period in 2001 due to the higher advertising and promotional expenditures incurred to support the launch of Sam Adams Light®.
During the third quarter, the Company’s Board of Directors authorized an additional $5.0 million, increasing the aggregate expenditure limitation to $50.0 million, for the Company’s Class A Common Stock repurchase program. As of September 28, 2002, the Company had repurchased a total of 5.0 million shares under this program at a cost of $45.0 million. The Company repurchased 635,000 shares of its outstanding Class A Common Stock during the third quarter of 2002.
The Company utilized $1.7 million for the purchase of capital equipment during the nine months ended September 28, 2002 as compared to $3.0 million during the same period last year. Purchases during the first nine months of 2002 primarily consisted of kegs and computer equipment.
With working capital of $55.9 million and $45.0 million in unused bank lines of credit as of September 28, 2002, the Company believes that its existing resources should be sufficient to meet the Company’s short-term and long-term operating and capital requirements. There were no amounts outstanding under the Company’s credit facilities as of September 28, 2002 or as of the date of this filing.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Hops Purchase Commitments
During 2001, the Company completed certain hop disposal transactions and cancelled certain hop future contracts. The transactions were deemed necessary in order to bring hop inventory levels and future contracts into balance with the Company’s current brewing volume and hop usage, as the Company did not believe that these hop inventories and future hop contracts would be used by the Company within the foreseeable future. During the nine months ending September 28, 2002 and September 29, 2001, the Company did not record significant charges for inventory reserves and cancellation fees associated with excess hops inventories and purchase commitments.
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The computation of the excess inventory and purchase commitment reserve requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. The Company’s accounting policy for hops inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed forecasted needs. The Company continues to manage inventory levels and purchase commitments in an effort to maximize utilization of hops on hand and hops under commitment. The current levels are deemed adequate, based upon foreseeable future brewing requirements. The Company does not anticipate further material losses related to hop inventories or contract commitments within the foreseeable future. However, if actual results differ from management’s assumptions or if management assumptions change regarding future sales growth, product mix, and hop market conditions, future material losses could result.
Recent Accounting Pronouncements
Critical Accounting Policies
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 29, 2001, 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.
FORWARD-LOOKING STATEMENTS
In this 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 events or circumstances after the date factor that may emerge, 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 unanticipated. Such risks and uncertainties include the factors set forth below in addition to the other information set forth in this Form 10-Q.
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Item 4. CONTROLS AND PROCEDURES
Within the ninety day period prior to the date of this report, 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-14 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 are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
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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)
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