Boston Beer Company - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Number of shares outstanding of each of the issuer’s classes of common stock, as of October 30, 2000:

 

 

THE BOSTON BEER COMPANY, INC.

 

 

 

 

THE BOSTON BEER COMPANY, INC.

(in thousands, except share data)

(unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements

THE BOSTON BEER COMPANY, INC.

(in thousands, except per share data)

(unaudited)

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

THE BOSTON BEER COMPANY, INC.

(in thousands)

(unaudited)

 

The accompanying notes are an integral part of the consolidated financial statements

 

THE BOSTON BEER COMPANY, INC.

 

 

The Boston Beer Company, Inc. (the “Company”) is engaged in the business of brewing and selling beer, malt beverages and cider products throughout the United States and select international markets. The accompanying consolidated financial position as of September 23, 2000 and the results of its consolidated operations and consolidated cash flows for the three and nine months ended September 23, 2000 and September 25, 1999 have been prepared by the Company, without audit, in accordance with 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 25, 1999.

 

In the opinion of the Company’s management, the Company’s unaudited consolidated financial position as of September 23, 2000 and the results of its consolidated operations and consolidated cash flows for the interim periods ended September 23, 2000 and September 25, 1999, 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.

 

 

At September 23, 2000, short-term investments consisted of mutual funds, United States government obligations and high-grade commercial paper. The Company’s investments in mutual funds are backed by United States government securities and are held for an indefinite period and thus are classified as available-for-sale. Available-for-sale securities are recorded at fair value with the change in fair value during the period excluded from earnings and recorded as a component of comprehensive income. The Company’s investments in debt securities, which typically mature in one year or less, are classified as held-to-maturity and are valued at amortized cost, which approximates fair value.

 

Fair value of investments in securities is summarized as follows (in thousands):

 

 

The gross unrealized gain on available-for-sale securities was $339,000 and $0 for the nine months ended September 23, 2000 and September 25, 1999, respectively.

 

 

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):

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.

 

 

 

Comprehensive income calculated in accordance with SFAS 130 is as follows (in thousands):

 

 

Accumulated other comprehensive income calculated in accordance with SFAS 130 is as follows (in thousands):

 

 

The Company has a contract with Genesee Brewing Company, Inc. (“Genesee”) to brew certain Samuel Adams® products at the Genesee’s brewery in Rochester, New York. In December 1999, Genesee announced its intentions to sell the Rochester brewery to City Brewing Company (“City Brewing”). On May 2, 2000, Genesee announced that the proposed transaction between Genesee and City Brewing was terminated. On August 30, 2000, Genesee announced the approval of an agreement to sell the brewery in a management led buy-out. The Company cannot be certain when, if at all, the proposed transaction will be consummated. The Company does not believe that its results of operations, cash flows or financial position will be materially affected as a result of the sale of Genesee. The Company believes that it would have access to sufficient brewery options to produce the volume that is currently brewed at Genesee. However, a shift in production between plants may result in incremental costs, primarily freight.

 

 

 

For purposes of this discussion, Boston Beer’s “core brands” include all products sold under Samuel Adams®, Oregon Original™, HardCore® or BoDean’s 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 brand is Samuel Adams Boston Lager®.

 

Net sales. Net sales increased by $1.8 million or 4.2% to $46.0 million for the three months ended September 23, 2000 as compared to the three months ended September 25, 1999. The increase is primarily due to an increase in volume of Boston Beer’s core brands coupled with normal price increases.

 

Volume. Volume increased by 5,000 barrels or 1.7% to 302,000 barrels in the three months ended September 23, 2000 from 297,000 barrels in the three months ended September 25, 1999. This increase was primarily due to an increase in the Company’s flagship brand and to volume generated from the introduction of BoDean’s Twisted Tea™ in March 2000. These increases were slightly offset by the discontinuation of certain year round styles.

 

Selling Price. The net selling price per barrel increased by approximately 2.4% to $152.52 per barrel for the three months ended September 23, 2000. This increase is primarily due to normal price increases that were slightly offset by the ratio of kegs to bottles. The ratio of kegs to bottles increased by 2.7% in core brands, with kegs representing 32.2% and 29.5% of total barrels shipped for the three months ended September 23, 2000 and September 25, 1999, respectively. The selling price per barrel is lower for kegs than bottles.

 

Gross Profit. Gross profit as a percentage of net sales slightly decreased by 0.6% to 56.9% for the three months ended September 23, 2000 as compared to 57.5% for the three months ended September 25, 1999. This decrease is primarily due to an increase in the cost of sales. Cost of goods sold slightly increased by 0.6% to 43.1% of net sales for the three months ended September 23, 2000 as compared to 42.5% of net sales for the three months ended September 25, 1999. This increase is attributed to rising inbound freight costs due to fuel surcharges, an increase in depreciation expense due to the purchase of kegs and raw material and corrugated price increases.

 

Advertising, promotional and selling. Advertising, promotional and selling expenses increased by $1.8 million or 9.6% to $20.1 million for the three months ended September 23, 2000 as compared to $18.3 million for the three months ended September 25, 1999. As a percentage of net sales, advertising, promotional and selling expenses increased to 43.7% for the three months ended September 23, 2000 as compared to 41.5% for the same period last year. This increase is primarily due to an increase in promotional expenditures and, to a lesser extent, higher outbound freight costs. These increases were slightly offset by a reduction in outdoor advertising spending.

 

Interest income. Interest income decreased by 10.6% to $514,000 for the three months ended September 23, 2000 as compared to $575,000 for the three months ended September 25, 1999. The decrease is primarily due to a shift in investments to non-interest bearing securities in which the change in fair value is recorded as a component of equity. The amount of unrealized gain recorded as a component of equity was $144,000 and $0 during the three months ended September 23, 2000 and September 25, 1999.

 

Additionally, the effect of lower monthly average cash and short-term investments balances of approximately $43.2 million during the three months ended September 23, 2000 as compared to an average balance of $44.2 million during the same period ended September 25, 1999, was offset by higher short-term interest rates. The lower cash and investment balances are due to the stock repurchase program discussed below in “ Liquidity and Capital Resources.”

 

Other income (expense), net. Other income (expense), net increased by $258,000 to income of $224,000 for the three months ended September 23, 2000 from expense of $34,000 for same period last year. The change is primarily due to a gain recognized from the disposal of fixed assets of $171,000 during the three months ended September 23, 2000.

 

 

Net sales. Net sales increased by $9.5 million or 7.2% to $141.7 million for the nine months ended September 23, 2000 as compared to the nine months ended September 25, 1999. The increase is primarily due to an increase in volume of Boston Beer’s core brands coupled with normal price increases.

 

Volume. Volume increased by 52,000 barrels or 5.9% to 927,000 barrels in the nine months ended September 23, 2000 from 875,000 barrels in the nine months ended September 25, 1999. This increase was primarily due to an increase in the Company’s flagship brand and to volume generated from the introduction of BoDean’s Twisted Tea™ in March 2000. These increases were slightly offset by the discontinuation of certain year round styles.

 

Selling Price. The net selling price increased by approximately 1.2% to $152.77 per barrel for the nine months ended September 23, 2000. This increase is primarily due to normal price increases as there were no significant changes in the packaging mix between kegs and bottles. The ratio of kegs to bottles remained consistent in core brands, with kegs representing 30.0% and 29.4% of total shipments relating to kegs for the nine months ended September 23, 2000 and September 25, 1999, respectively.

 

Gross Profit. Gross profit and cost of sales as a percentage of net sales were 56.5% and 43.5%, respectively, for the nine months ended September 23, 2000, and were consistent with the same period last year. The gross profit per barrel increased slightly to $86.29 for the nine months ended September 23, 2000 as compared to $85.49 for the same period last year. This increase is primarily due to normal price increases.

 

Advertising, promotional and selling. Advertising, promotional and selling expenses increased by $5.7 million or 11.2% to $56.8 million for the nine months ended September 23, 2000 as compared to $51.1 million for the nine months ended September 25, 1999. As a percentage of net sales, advertising, promotional and selling expenses increased to 40.1% for the nine months ended September 23, 2000 as compared to 38.7% for the same period last year. This increase is primarily due to an increase in promotional expenditures and, to a lesser extent, higher outbound freight costs.

 

Interest income. Interest income decreased by 12.1% to $1.5 million for the nine months ended September 23, 2000 as compared to $1.7 million for the nine months ended September 25, 1999. This decrease is primarily due to a shift in investments to non-interest bearing securities in which the change in fair value is recorded as a component of equity. The amount of unrealized gain recorded as a component of equity was $339,000 and $0 for the nine months ended September 23, 2000 and September 25, 1999, respectively.

 

Additionally, the effect of lower monthly average cash and short-term investments balances of approximately $42.7 million during the nine months ended September 23, 2000 as compared to $48.7 million during the nine months ended September 25, 1999, was partially offset by higher short-term interest rates. The lower cash and investment balances are due to the stock repurchase program discussed below in “Liquidity and Capital Resources.”

 

Interest expense. There was no interest expense for the nine months ended September 23, 2000 as compared to $148,000 for the nine months ended September 25, 1999. The decline in interest expense is due to the repayment of the $10.0 million outstanding balance under the existing lines of credit on March 31, 1999.

 

Other income (expense), net. Other income (expense), net increased by $468,000 to income of $445,000 for the nine months ended September 23, 2000 from expense of $23,000 for same period last year. The change is primarily due to a gain recognized from the disposal of fixed assets of $404,000 during the nine months ended September 23, 2000.

 

 

The Company’s financial condition continued to be strong during the first nine months of 2000. Cash and short-term investments increased to $45.7 million as of September 23, 2000 from $44.3 million as of December 25, 1999. This increase is primarily due to cash provided by operating activities partially offset by cash used for the repurchase of the Company’s stock and to a lesser extent, cash used for the purchase of capital equipment. Cash provided by operating activities increased by $5.2 million to $14.8 million for the nine months ended September 23, 2000, primarily due to working capital timing differences.

 

Effective October 15, 1998, the Board authorized management to implement a stock repurchase program, initially subject to an aggregate expenditure limitation of $10.0 million. In 1999 this limitation was increased to $20.0 million, then to $25.0 million on April 14, 2000 and in October 2000, the Board increased the aggregate expenditure limitation further to $35.0 million. The Company repurchased 1,212,500 shares of its outstanding Class A Common Stock at an aggregate cost of $9.4 million during the nine months ended September 23, 2000. The Company did not repurchase any Company shares during the same period last year. As of October 30, 2000, the Company had repurchased 3.8 million shares under this program at an aggregate cost of $30.5 million.

 

The Company utilized an additional $3.1 million for purchases of capital equipment during the first nine months of the year compared to the same period last year. The capital equipment purchased primarily consisted of kegs.

 

With working capital of $57.7 million and $45.0 million in unused bank lines of credit as of September 23, 2000, the Company believes that its existing resources should be sufficient to meet the Company’s short-term and long-term operating and capital requirements.

 

THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES

 

 

During the early 1990’s, the Company entered into purchase commitments for hops based on forecasted future requirements, among other factors. In the late 1990’s, the Company’s sales growth did not meet the levels previously forecasted, and as a result, the Company experienced an increase in hop inventory and an excess of purchase commitments. As a result, the Company recorded charges of $128,000 and $1.2 million related to the reserve for excess hops inventory and purchase commitments and fees associated with the cancellation of contracts during the nine months ended September 23, 2000 and September 25, 1999, respectively. 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 computation of the excess purchase commitment reserve requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. Actual results may materially differ from management’s estimates.

 

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). This statement requires that all derivative financial instruments be reflected on the balance sheet at fair value, with changes in fair value recognized periodically in earnings or as a component of equity, depending on the nature of the underlying instrument being hedged. In the event that an entity does not effectively hedge against the underlying derivative, changes in the fair market value of the underlying derivative will be recognized currently in the income statement. As issued, SFAS 133 is effective for all fiscal years beginning after June 15, 1999, with earlier application encouraged. In May 1999, the FASB issued SFAS 137, which delayed the effective date of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, an amendment to SFAS 133.

 

grown. Currently, it is the Company’s policy not to hedge against foreign currency fluctuations. Management is currently evaluating the effect that SFAS 133 and SFAS 138 is expected to have on the Company’s financial statements.

 

 

Since December 25, 1999, 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.

 

 

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.

 

 

 

 

 

* Filed with this report.