Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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 June 28, 2008
OR
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o |
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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
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04-3284048 |
(State or other jurisdiction of incorporation
or organization)
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(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
(Registrants 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 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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Large accelerated filer o
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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) |
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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 issuers classes of common stock, as of August 1, 2008:
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Class A Common Stock, $.01 par value Class B Common Stock, $.01 par value |
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9,941,377
4,107,355 |
(Title of each class)
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(Number of shares) |
THE BOSTON BEER COMPANY, INC.
FORM 10-Q
QUARTERLY REPORT
JUNE 28, 2008
TABLE OF CONTENTS
2
PART I. Item 1. FINANCIAL INFORMATION
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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June 28, |
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December 29, |
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2008 |
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2007 |
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(unaudited) |
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Assets
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Current Assets: |
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Cash and cash equivalents |
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$ |
19,386 |
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$ |
79,289 |
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Short-term investments |
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16,200 |
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Accounts receivable, net of allowance for
doubtful accounts of $280 and $249 as of June
28, 2008 and December 29, 2007, respectively |
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28,351 |
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17,972 |
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Inventories |
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25,526 |
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18,090 |
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Prepaid expenses and other assets |
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3,442 |
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2,152 |
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Deferred income taxes |
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2,090 |
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2,090 |
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Total current assets |
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78,795 |
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135,793 |
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Property, plant and equipment, net |
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124,741 |
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46,198 |
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Other assets |
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990 |
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12,487 |
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Goodwill |
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1,377 |
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1,377 |
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Total assets |
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$ |
205,903 |
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$ |
195,855 |
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Liabilities and Stockholders Equity
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Current Liabilities: |
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Accounts payable |
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$ |
30,246 |
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$ |
17,708 |
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Accrued expenses |
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40,090 |
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40,349 |
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Total current liabilities |
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70,336 |
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58,057 |
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Deferred income taxes |
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1,215 |
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1,215 |
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Other liabilities |
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2,762 |
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2,995 |
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Total liabilities |
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74,313 |
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62,267 |
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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; 9,927,718 and
10,095,573 shares issued and outstanding as of
June 28, 2008 and December 29, 2007,
respectively |
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99 |
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101 |
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Class B Common Stock, $.01 par value; 4,200,000
shares authorized; 4,107,355 shares issued and
outstanding |
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41 |
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41 |
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Additional paid-in capital |
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97,292 |
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88,754 |
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Accumulated other comprehensive loss, net of tax |
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(204 |
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(204 |
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Retained earnings |
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34,362 |
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44,896 |
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Total stockholders equity |
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131,590 |
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133,588 |
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Total liabilities and stockholders equity |
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$ |
205,903 |
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$ |
195,855 |
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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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Six months ended |
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June 28, |
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June 30, |
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June 28, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue (net of product recall returns of $3,248
and $12,328 for the three and six months ended
June 28, 2008) |
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$ |
128,701 |
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$ |
102,301 |
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$ |
212,979 |
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$ |
182,035 |
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Less excise taxes |
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11,329 |
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9,433 |
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19,484 |
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16,719 |
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Net revenue |
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117,372 |
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92,868 |
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193,495 |
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165,316 |
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Cost of goods sold (including costs associated
with product recall of $2,361 and $8,292 for the
three and six months ended June 28, 2008) |
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57,571 |
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40,130 |
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102,044 |
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72,256 |
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Gross profit |
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59,801 |
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52,738 |
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91,451 |
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93,060 |
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Operating expenses: |
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Advertising, promotional and selling expenses |
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35,744 |
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32,620 |
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67,245 |
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59,126 |
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General and administrative expenses |
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9,138 |
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6,130 |
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16,649 |
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11,428 |
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Write-off of brewery costs |
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3,443 |
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3,443 |
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Total operating expenses |
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44,882 |
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42,193 |
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83,894 |
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73,997 |
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Operating income |
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14,919 |
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10,545 |
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7,557 |
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19,063 |
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Other income, net: |
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Interest income |
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422 |
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1,074 |
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1,182 |
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2,039 |
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Other income, net |
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104 |
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172 |
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214 |
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339 |
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Total other income, net |
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526 |
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1,246 |
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1,396 |
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2,378 |
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Income before provision for income taxes |
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15,445 |
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11,791 |
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8,953 |
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21,441 |
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Provision for income taxes |
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6,920 |
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5,000 |
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4,167 |
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8,882 |
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Net income |
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$ |
8,525 |
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$ |
6,791 |
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$ |
4,786 |
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$ |
12,559 |
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Net income per common share basic |
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$ |
0.61 |
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$ |
0.48 |
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$ |
0.35 |
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$ |
0.89 |
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Net income per common share diluted |
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$ |
0.60 |
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$ |
0.46 |
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$ |
0.33 |
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$ |
0.86 |
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Weighted-average number of common shares basic |
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13,884 |
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14,204 |
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13,867 |
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14,161 |
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Weighted-average number of common shares diluted |
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14,308 |
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14,680 |
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14,319 |
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14,638 |
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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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Six months ended |
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June 28, |
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June 30, |
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2008 |
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2007 |
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Cash flows provided by operating activities: |
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Net income |
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$ |
4,786 |
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$ |
12,559 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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4,563 |
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2,939 |
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Write-off of brewery costs |
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3,443 |
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Loss on disposal of property, plant and equipment |
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2 |
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Bad debt expense |
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38 |
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20 |
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Stock-based compensation expense |
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2,354 |
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1,445 |
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Excess tax benefit from stock-based compensation arrangements |
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(2,558 |
) |
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(1,323 |
) |
Purchases of trading securities |
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(16,290 |
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Proceeds from sale of trading securities |
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16,200 |
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14,768 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(10,417 |
) |
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(6,499 |
) |
Inventories |
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(7,436 |
) |
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(1,525 |
) |
Prepaid expenses and other assets |
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(1,159 |
) |
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(627 |
) |
Accounts payable |
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12,538 |
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3,797 |
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Accrued expenses |
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2,299 |
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|
881 |
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Other liabilities |
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(233 |
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(206 |
) |
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Net cash provided by operating activities |
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20,975 |
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13,384 |
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Cash flows used in investing activities: |
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Purchases of property, plant and equipment |
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(26,561 |
) |
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(8,545 |
) |
Proceeds from disposal of property, plant and equipment |
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2 |
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Purchase of assets from Diageo North America, Inc. |
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(44,967 |
) |
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Net cash used in investing activities |
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(71,528 |
) |
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(8,543 |
) |
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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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(15,324 |
) |
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Proceeds from exercise of stock options |
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3,203 |
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2,574 |
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Excess tax benefit from stock-based compensation arrangements |
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2,558 |
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1,323 |
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Net proceeds from sale of investment shares |
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213 |
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155 |
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Net cash (used in) provided by financing activities |
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(9,350 |
) |
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4,052 |
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Change in cash and cash equivalents |
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(59,903 |
) |
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8,893 |
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Cash and cash equivalents at beginning of period |
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79,289 |
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63,147 |
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Cash and cash equivalents at end of period |
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$ |
19,386 |
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$ |
72,040 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
7,415 |
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$ |
7,023 |
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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 Companys Samuel Adams® beer and Sam Adams Light® are produced and sold under the
trade name, The Boston Beer Company. The accompanying consolidated statement of financial
position as of June 28, 2008 and the statements of consolidated operations and consolidated cash
flows for the interim periods ended June 28, 2008 and June 30, 2007 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 Companys Annual
Report on Form 10-K for the year ended December 29, 2007.
Managements Opinion
In the opinion of the Companys management, the Companys unaudited consolidated financial position
as of June 28, 2008 and the results of its consolidated operations and consolidated cash flows for
the interim periods ended June 28, 2008 and June 30, 2007, 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. Short-Term Investments
In January 2008, the Company liquidated all of its short-term investments. The Companys
short-term investments consisted of municipal auction rate securities as of December 29, 2007, and
were classified as trading securities which are recorded at fair market value and whose change in
fair market value is recorded in earnings. The Company recorded no realized gains or losses on
short-term investments for the interim periods ended June 28, 2008 and June 30, 2007.
C. 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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June 28, |
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December 29, |
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2008 |
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2007 |
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(in thousands) |
|
Raw materials |
|
$ |
14,898 |
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|
$ |
11,229 |
|
Work in process |
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|
6,212 |
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|
4,116 |
|
Finished goods |
|
|
4,416 |
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|
2,745 |
|
|
|
|
|
|
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|
$ |
25,526 |
|
|
$ |
18,090 |
|
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|
6
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. 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 |
|
|
Six months ended |
|
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|
June 28, |
|
|
June 30, |
|
|
June 28, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
Net income |
|
$ |
8,525 |
|
|
$ |
6,791 |
|
|
$ |
4,786 |
|
|
$ |
12,559 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
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|
Weighted average shares of Class A Common Stock |
|
|
9,777 |
|
|
|
10,097 |
|
|
|
9,760 |
|
|
|
10,054 |
|
Weighted average shares of Class B Common Stock |
|
|
4,107 |
|
|
|
4,107 |
|
|
|
4,107 |
|
|
|
4,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share basic |
|
|
13,884 |
|
|
|
14,204 |
|
|
|
13,867 |
|
|
|
14,161 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
402 |
|
|
|
458 |
|
|
|
430 |
|
|
|
459 |
|
Non-vested investment shares and restricted stock |
|
|
22 |
|
|
|
18 |
|
|
|
22 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
424 |
|
|
|
476 |
|
|
|
452 |
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in net income per common share diluted |
|
|
14,308 |
|
|
|
14,680 |
|
|
|
14,319 |
|
|
|
14,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.61 |
|
|
$ |
0.48 |
|
|
$ |
0.35 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
0.60 |
|
|
$ |
0.46 |
|
|
$ |
0.33 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share for each share of Class A Common Stock and Class B Common Stock
is $0.61 and $0.48 for the three months ended June 28, 2008 and June 30, 2007, respectively, and
$0.35 and $0.89 for the six months ended June 28, 2008 and June 30, 2007, 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.
During the three and six months ended June 28, 2008, the Company had 0.4 and 0.5 million dilutive
potential common shares, respectively, which were not included in the computation of net loss per
diluted share because these shares would be antidilutive.
E. Comprehensive Income or Loss
Comprehensive income or loss represents net income or loss, plus defined benefit plans liability
adjustment, net of tax effect. The defined benefit plans liability adjustments for the interim
periods ended June 28, 2008 and June 30, 2007 were not material.
F. Commitments and Contingencies
Purchase Commitments
The Company had outstanding non-cancelable purchase commitments related to advertising contracts
of approximately $8.4 million at June 28, 2008.
The Company has entered into contracts for the 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 June 28, 2008 totaled $50.8 million, based on the exchange rates on that date.
2008 capital expenditures for the newly acquired brewery in Lehigh Valley, Pennsylvania (the
Pennsylvania Brewery) are estimated to be between $45.0 million and $55.0 million, of which $18.8
had been incurred as of June 28, 2008. The Company had outstanding non-cancelable purchase
commitments related to capital expenditures for the Pennsylvania Brewery of $17.8 million as of
June 28, 2008.
Other outstanding purchase commitments totaled $4.0 million at June 28, 2008.
7
Contingent Excise Tax Liability
During the third quarter of 2007, the Alcohol and Tobacco Tax and Trade Bureau of the U.S.
Treasury Department (the TTB) performed a routine audit of the Companys brewery in Cincinnati,
Ohio (the Cincinnati Brewery) and other breweries where some of the Companys products are
produced (the TTB Audit). In February 2008, the TTB formally disputed the Companys regulatory
and tax treatment of certain of its 2006 and 2007 Twisted Tea shipments and the Company received a
notice of demand for additional excise taxes plus interest and penalties of approximately
$8.5 million. The TTB has asserted that these shipments were not classified consistent with TTB
regulations that took effect January 1, 2006. Based on the Companys analysis, it believes that
most of its Twisted Tea shipments were in compliance with applicable regulations. Based on the
information previously collected and its earlier assessment of likely outcomes, the Company
recorded a provision of $3.9 million in the third quarter of 2007. The Company continues to
maintain this provision in its June 28, 2008 financial statements.
During the second quarter of 2008, the Company met with the TTB and presented its analysis of the
events identified by the TTB Audit. Settlement discussions are
underway. While it is too early to tell the final result, based on available information, the Companys provision of $3.9
million appears adequate to cover the cost of likely outcomes to the
Company. Based on
communications it has received from the TTB to date, the Company currently estimates that its
maximum possible exposure related to the issue raised by the TTB is approximately $8.5 million.
G. Stock Option Grant to Chief Executive Officer
Effective January 1, 2008, the Company granted the Chief Executive Officer an option to purchase
753,864 shares of its Class A Common Stock, which vest over a five-year period, commencing on
January 1, 2014, at the rate of 20% per year. The exercise price is determined by multiplying
$42.00 by the aggregate change in the DJ Wilshire 5000 Index from and after January 1, 2008
through the close of business on the trading date next preceding each date on which the option is
exercised. The exercise price will not be less than $37.65 per share and the excess of the fair
value of the Companys Class A Common Stock over each actual exercise price cannot exceed $70 per
share. The Company has accounted for this award as a market-based award under the Monte Carlo
Simulation pricing model and calculated the weighted average fair value per share to be $8.41.
During the three months and six months ended June 28, 2008, the Company recorded stock-based
compensation expense of $0.2 million and $0.4 million, respectively, related to this stock option
grant.
H. Income Taxes
As of June 28, 2008 and December 29, 2007, the Company had approximately $6.3 million and $6.6
million, respectively, of unrecognized income tax benefits. The change in the balance of
unrecognized tax benefits is primarily due to a decrease related to a payment made in connection
with the completion of an Internal Revenue Service (IRS) examination, partially offset by
incremental increases in unrecognized tax benefits for the six months ended June 28, 2008.
The Companys practice is to classify interest and penalties related to income tax matters in
income tax expense. As of June 28, 2008, the Company had $1.3 million accrued for interest and
penalties.
During the six months ended June 28, 2008, the IRS completed an examination of the Companys 2004
and 2005 consolidated corporate income tax returns. At the completion of the IRS examination, the
Company made a payment to the IRS of $0.8 million, including tax and interest. As a result, the
Company reduced its unrecognized tax benefits by $0.5 million and recognized a tax benefit of $0.1
million.
The Companys state income tax returns remain subject to examination for three or four years
depending on the states statute of limitations. In addition, the Company is generally obligated
to report changes in taxable income arising from federal income tax audits.
It is reasonably possible that the Companys unrecognized tax benefits may increase or continue to
decrease significantly in 2008 due to the commencement or completion of certain state 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 Companys financial position, results of operations or cash flows.
8
I. Fair Value Measurements
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, on December 30, 2007, the first day of its 2008 fiscal year. SFAS No. 157 defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date, an exit price. The
standard outlines a valuation framework and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and the related disclosures. Under
existing accounting pronouncements, certain assets and liabilities are measured at fair value and
SFAS No. 157 expands the disclosures that are required for items measured at fair value. Further,
under SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding
an amendment of FASB Statement No. 115, entities are permitted to choose to measure many financial
instruments and certain other items at fair value. The Company did not elect the fair value
measurement option under SFAS No. 159 for any of its financial assets or liabilities.
On the date of the adoption, or December 30, 2007, the Company applied the provisions of SFAS No.
157 to its short-term investments which consisted of trading securities. To measure the fair value
of its short-term investments, the Company used Level 1 inputs from a fair value hierarchy of three
levels according to SFAS No. 157, under which inputs represent unadjusted quoted prices in active
markets for identical items. The adoption of SFAS No. 157 did not affect the Companys financial
position, results of operations or cash flows.
As permitted by Financial Accounting Standards Board Staff Position No. 157-2, the Company will not
apply the provisions of SFAS No. 157 to the following items until 2009: property, plant and
equipment and goodwill. The Company is in the process of evaluating the impact of the deferred
provisions of SFAS No. 157 on its 2009 consolidated financial position, operations and cash flows.
J. 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 supplies bottles to the Company. The
glass plant in question supplied approximately 25% of the Companys glass bottles during the first
quarter of 2008.
During the first quarter of 2008, the Company recorded an estimated accrual for product returns of
$9.1 million and an estimated accrual for recall-related costs of $4.2 million and wrote-off $1.7
million of affected inventory, representing an estimate of 200,000 cases. During the three months
ended June 28, 2008, additional charges of $3.2 million for product returns, $1.9 million for
recall-related costs and $0.4 million for inventory write-offs were recorded based on actual recall
activities and inventory counts during the quarter and an estimate of remaining activities to be
incurred. The estimated returns have been recorded as a reduction of revenue and the costs of the
recall and the inventory write-off have been included in cost of goods sold, since substantially
all of the costs incurred are a direct result of the packaging defect. For the three and six
months ended June 28, 2008, the recorded recall charges resulted in a total reduction to operating
income and income before income taxes of $5.6 million and $20.6 million, respectively, and a
reduction to net income of $2.8 million and $11.6 million, respectively. The net income per basic
and dilutive share effect from the recall charges were $0.20 and $0.19, respectively, for the three
months ended June 28, 2008 and $0.83 and $0.81, respectively, for the six months ended June 28,
2008.
9
The following table summarizes the Companys reserves and reserve activities for the product recall
for the three months ended June 28, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves at |
|
|
|
|
|
|
|
|
|
|
Reserves at |
|
|
|
March 29, |
|
|
Reserves |
|
|
Changes in |
|
|
June 28, |
|
|
|
2008 |
|
|
Used |
|
|
Estimates |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product returns |
|
$ |
9,079 |
|
|
$ |
(12,133 |
) |
|
$ |
3,248 |
|
|
$ |
194 |
|
Recall-related costs |
|
|
4,175 |
|
|
|
(2,929 |
) |
|
|
1,933 |
|
|
|
3,179 |
|
Inventory reserves |
|
|
1,757 |
|
|
|
(727 |
) |
|
|
428 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,011 |
|
|
$ |
(15,789 |
) |
|
$ |
5,609 |
|
|
$ |
4,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for returns is based on an estimate of 725,000 affected cases of the Companys
products at retail and wholesale, and sale prices of relevant products. Such estimates are updated
using actual returns and information of remaining cases to be returned provided by distributors
that are available to date to the Company as of June 28, 2008. The recall-related costs primarily
include fees and incentives to wholesalers for their effort to return the products, freight and
destruction charges for returned products, warehouse and inspection fees, repackaging materials,
point-of-sale materials and other costs. These costs are calculated based upon the estimated
number of affected bottles, the Companys historical costs for various activities such as freight,
destruction and warehousing, agreed upon incentives with retailers and wholesalers and costs
incurred to-date. The Company is completing the process of collecting cases of suspected product
and depending on the results of that process, actual cases affected and costs associated could be
different from these estimates. As of June 28, 2008, a significant portion of the remaining direct
costs related to the recall to be paid represents incentives to wholesalers and the Company expects
to have paid the majority of all direct costs related to the recall within the next three months.
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 June 28, 2008 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.
K. Purchase of Brewery Assets in Lehigh Valley, Pennsylvania
As part of its strategy of combining brewery ownership with production arrangements at breweries
owned by third parties, on June 2, 2008, the Company completed the acquisition of substantially all
of the assets of a brewery located in Upper Macungie Township in Lehigh Valley, Pennsylvania
(the Pennsylvania Brewery) from Diageo North America, Inc. (Diageo) in exchange for cash. The
Company intends to brew a significant portion of its Samuel Adams® craft beers at the Pennsylvania
Brewery. The aggregate purchase price for the acquisition of assets
was $56.5 million, which includes $54.6 million in purchase
price and $1.9 million in transaction costs, and represents property, plant and equipment.
In June 2008, the Company reclassified $11.5 million representing previously made deposits to
Diageo and transaction costs from other assets to property, plant and equipment, net, in the
accompanying consolidated balance sheet.
L. Packaging Services Agreement
In connection with the purchase and sale arrangement, Diageo and the Company entered into a
Packaging Services Agreement dated August 1, 2007 (the Packaging Services Agreement), pursuant to
which the Company has 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 has a term of approximately two
years. Similar to contracts that the Company has historically entered into to meet its supply
needs, the agreement provides for guaranteed service capacity and production service for producing
Diageo products which includes labor, machinery and warehouse space; however, there are no minimum
volume guarantees by Diageo and the capacity commitment by the Company will decline over the term
of the agreement. During the three months ended June 28, 2008, the Company recorded $1.2 million
in revenue related to the Packaging Services Agreement.
10
PART I. Item 2. MANAGEMENTS 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 and six-month periods ended June 28, 2008, as compared to
the three and six-month periods ended June 30, 2007. This discussion should be read in conjunction
with the Managements Discussion and Analysis of Financial Condition and Results of Operations, and
the Consolidated Financial Statements of the Company and Notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 29, 2007.
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 Companys brewery in Cincinnati, Ohio (the Cincinnati Brewery), which
detected glass inclusions in certain bottles of beer. The bottles were from a single glass plant
that supplies bottles to the Company. The glass plant in question supplied approximately 25% of
the Companys glass bottles during the first quarter of 2008.
To date, the Company estimates it has quarantined for destruction approximately 925,000 cases of
the affected products, of which approximately 200,000 cases had been under its control at its
breweries or warehouses. The full costs of this effort include drinker rebates, product credits,
fees and incentives to retailers and wholesalers for the recall, lost product, freight and
destruction charges for returned product, warehouse and inspection fees, repackaging materials,
point-of-sale materials and other costs. The Company also faces the potential for future lost
sales and believes that it may have experienced lost sales at retail which probably contributed
somewhat to the slower growth rate in depletions for the second quarter.
The Company currently believes it may have claims against the supplier of these glass bottles for
the impact of the recall, but it is not yet possible to predict the outcome of such potential
claim. Consequently, no amounts have been recorded as receivable as of June 28, 2008 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.
As a result of the recall, the Company recorded charges that negatively impacted its operating
results before tax by $20.6 million and net income by $11.6 million for the six months ended June
28, 2008. The recorded charges are based on actual recall activities and information available to
the Company as of June 28, 2008. The Company is completing the process of collecting cases of
suspected product and depending on the results of that process, actual cases affected and costs
associated could be different from these estimates. As of June 28, 2008, a significant portion of
the remaining direct costs related to the recall to be paid represents incentives to wholesalers
and the Company expects to have paid the majority of all direct costs related to the recall within
the next three months. The Company believes that it replenished some of the recalled shipments in
the second quarter resulting in higher shipments and revenue than would have normally been
anticipated absent the recall for the quarter and any benefit from this is not included in the
above provision.
RESULTS OF OPERATIONS
Boston Beers flagship product is Samuel Adams Boston Lagerâ. For purposes of this
discussion, Boston Beers 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 at the Cincinnati Brewery and the recently acquired brewery in Pennsylvania
(the Pennsylvania Brewery) under contract arrangements for third parties which are not
significant to the Companys total sales.
Three Months Ended June 28, 2008 compared to Three Months Ended June 30, 2007
Net revenue. Net revenue increased by $24.5 million or 26.4% to $117.4 million for the three months
ended June 28, 2008, as compared to $92.9 million for the three months ended June 30, 2007. The
increase was primarily due to an increase in the shipment volume of Boston Beers core brands, net
of additional returns of 13,000 barrels (or 175,000 cases) of products as a result of the product
recall, an increase of approximately 5% in net revenue per barrel and the commencement of the
packaging services agreement with Diageo North America, Inc. (Diageo). The estimated effect of
the additional returns of 175,000 cases was $3.2 million, which was based on actual returns
activity during the quarter. The actual effect of returns related to the product recall could
differ from this estimate.
11
Volume. Total shipment volume, net of an additional estimated 13,000 barrels of recalled products,
increased by 27.8% to 648,000 barrels for the three months ended June 28, 2008, as compared to
507,000 barrels for the three months ended June 30, 2007. Shipment volume for the core brands
increased by 19.0% to 588,000 barrels, due to increases in Samuel Adams® brand family
and Twisted Tea® brand family shipments. Prior to the reversal of shipments of recalled
product, the shipment volume increase was approximately 21.7% primarily resulting from the growth
in the Samuel Adams® brand family shipments, driven by double-digit growth rates in
Samuel Adams® Seasonals and Samuel Adams® Brewmasters Collection.
Shipments and orders in-hand suggest that core shipments through
August of 2008 will be up approximately 12% as compared to the same
period in 2007. Net of product returns, core shipments and orders
in-hand are estimated
to be up approximately 8% through August of 2008. 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 Companys core brands for the second
quarter of 2008 increased by approximately 8% over the same period in
2007. Year-to-date
depletions reported to the Company through July 26, 2008 are
estimated to be up approximately 10% over 2007, but this
number may not be indicative of actual business trends due to some inconsistency in reporting due
to the recall. The Company believes that wholesaler inventory levels at June 28, 2008 were slightly
higher than last years levels, as reflected in shipments exceeding depletions and that such
inventory would normally be expected to unwind during the course of the year.
Net Selling Price. The net selling price per barrel for core brands increased by 5.5% to $196.74
per barrel for the three months ended June 28, 2008, as compared to $186.54 for the same period
last year. This increase in net selling price per barrel is primarily due to price increases
combined with lower discount rates implemented in the first quarter, but slightly offset by the
effect of the recall.
Gross profit. Gross profit for core brands was $101.15 per barrel for the three months ended June
28, 2008, as compared to $106.24 for the three months ended June 30, 2007. Gross margin for core
brands was 51.4% for the three months ended June 28, 2008, as compared to 57.0% for the three
months ended June 30, 2007. The decreases in gross profit per barrel and gross margin are
primarily due to a $2.4 million charge for additional costs associated with the product recall,
such as fees and incentives to wholesalers for their effort to return the products, freight and
destruction charges for returned products, and warehouse and inspection fees. The effect of the
additional charge for product recall costs on gross margin was approximately 3 percentage points.
To a lesser extent, the decreases in gross profit per barrel and gross margin resulted from an
increase in cost of goods sold per barrel as compared to the prior year, partially offset by
increases in the Companys net selling price.
Cost of goods sold for core brands increased by $11.27 per barrel to $91.57 per barrel and was
46.5% as a percentage of net revenue for the three months ended June 28, 2008, as compared to
$80.30 per barrel and 43.0% as a percentage of net revenue for the three months ended June 30,
2007. The increase in cost per barrel resulted from higher ingredient, package material,
production and depreciation costs, a shift in product mix and a slight change in package mix. The
Company expects most of the year-on-year cost pressures to continue during the remainder of the
year.
Excluding the impact of the product recall, 2008 full year gross margin as a percent of net revenue
could be down as much as four percentage points below full year 2007 levels, based on available
cost increase information and preliminary pricing expectations.
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 Companys gross margins may not be comparable to other entities
that classify costs related to distribution differently.
Advertising, promotional and selling. Advertising, promotional and selling expenses increased by
$3.1 million, or 9.5%, to $35.7 million for the three months ended June 28, 2008, as compared to
$32.6 million for the three months ended June 30, 2007. The increase is primarily due to increases
in freight expenses to wholesalers, salary and benefit costs and local promotions. Advertising,
promotional and selling expenses for core brands were 30.9% of net revenue, or $60.79 per barrel,
for the three months ended June 28, 2008, as compared to 35.4% of net revenue, or $66.03 per
barrel, for the three months ended June 30, 2007. The decreases in advertising, promotional and
selling expenses per barrel and as a percentage of net revenue are due to the timing of advertising
projects. 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.
12
The Company conducts certain advertising and promotional activities in its wholesalers markets,
and the wholesalers make contributions to the Company for such efforts. These amounts are included
in the Companys 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 increased by $3.0 million, or
49.2%, to $9.1 million for the three months ended June 28, 2008, as compared to $6.1 million for
the same period last year. The increase primarily reflects the addition of startup and recurring
planned administrative costs related to the Pennsylvania Brewery, increases in salary and benefit
costs and legal expenses.
Write-off of Brewery Costs. During the second quarter of 2007, the Company recorded a $3.4 million
write-off of capitalized costs related to the potential construction of a new brewery to be located
in Freetown, Massachusetts. The Company concluded that the likelihood of this project
significantly diminished as the Companys negotiations with Diageo progressed and
ultimately resulted in the Companys purchase of the Pennsylvania Brewery.
Total other income, net. Total other income, net, decreased by $0.7 million to $0.5 million for
the three months ended June 28, 2008 primarily due to less interest earned on lower average cash
and investment balances during the second quarter of 2008 as compared to the same period in 2007.
Provision for income taxes. The Companys effective tax rate increased to approximately 44.8% for
the three months ended June 28, 2008 from 42.4% for the same period last year. This increase in the
effective tax rate is primarily due to increased unfavorable permanent items, primarily due to
increased meals and entertainment as well as a reduced production activity benefit on a lower level
of pretax income. The Company expects the effective tax rate to be approximately 46% for the full
year 2008.
Six Months Ended June 28, 2008 compared to Six Months Ended June 30, 2007
Net revenue. Net revenue increased by $28.2 million or 17.1% to $193.5 million for the six months
ended June 28, 2008 from $165.3 million for the six months ended June 30, 2007. The increase was
primarily due to an increase in the shipment volume of Boston Beers core brands, net of
anticipated returns of 53,000 barrels (or 725,000 cases) of products as a result of the product
recall, as well as an increase of approximately 5% in net revenue per barrel. The estimated effect
of the anticipated returns of 725,000 cases was $12.3 million, which was based on actual returns
activity during the second quarter. Total actual returns related to the product recall could
differ from this estimate.
Volume. Total shipment volume, net of the estimated 53,000 barrels of recalled products, increased
by 16.5% to 1,052,000 barrels for the six months ended June 28, 2008 as compared to the same period
2007. Shipment volume for the core brands increased by 11.4% to 986,000 barrels, due primarily to
increases in Samuel Adams® brand family and Twisted Tea® brand family
shipments. Prior to the reversal of shipments related to the recall, the core shipment volume
increase was approximately 17% as a result of the growth in Samuel Adams® brand family
shipments, driven by high double-digit growth rates in Samuel Adams® Seasonals and
Samuel Adams® Brewmasters Collection.
Net Selling Price. The net selling price per barrel for core brands increased by approximately 4.6%
to $194.06 per barrel for the six months ended June 28, 2008 as compared to the prior year. This
increase in net selling price per barrel is primarily due to price increases combined with lower
discount rates implemented in the first quarter, but slightly offset by the effect of the recall.
Gross profit. Gross profit for core brands was $92.35 per barrel for the six months ended June 28,
2008, as compared to $104.68 for the six months ended June 30, 2007. Gross margin for core
products was 47.6% for the first six months of 2008, as compared to 56.4% for the same period in
2007. The decreases in gross profit per barrel and gross margin are primarily due to an
$8.3 million charge for estimated costs associated with the product recall, such as fees and
incentives to wholesalers for their effort to return the products, freight and destruction charges
for returned products, warehouse and inspection fees, repackaging materials, and point-of-sale
materials costs. The effect of the charge for product recall costs on gross margin was
approximately 7 percentage points. To a lesser extent, the decreases in gross profit per barrel and
gross margin resulted from an increase in cost of goods sold per barrel as compared to the prior
year, partially offset by increases in the Companys net selling price.
13
Cost of goods sold for core products increased by 15.5% or $12.51 per barrel to $93.30 per barrel
for the six months ended June 28, 2008, as compared to $80.79 per barrel for the same period last
year. The cost per barrel increase is primarily due to the costs of products sold for which the
associated revenue was reversed due to the product recall. The remaining increase in cost per
barrel resulted from higher ingredient, package material, production and depreciation costs and a
shift in product mix, partially offset by a slight change in package mix. The Company expects most
of the year-on-year cost pressures to continue during the remainder of the year.
Advertising, promotional and selling. Advertising, promotional and selling expenses increased by
$8.1 million, or 13.7%, to $67.2 million for the six months ended June 28, 2008, as compared to
$59.1 million for the six months ended June 30, 2007. Advertising, promotional and selling
expenses for core brands were 35.1% of net revenue, or $68.20 per barrel, for the six months ended
June 28, 2008, as compared to 36.0% of net revenue, or $66.81 per barrel, for the six months ended
June 30, 2007. The decreases in advertising, promotional and selling expenses as a percentage of
net revenue are due to the timing of advertising projects. 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.
General and administrative. General and administrative expenses increased by 45.7% or $5.2 million
to $16.6 million for the six months ended June 28, 2008 as compared to the same period last year.
The increase in general and administrative expenses is primarily due to an increase in salary and
benefits, the addition of startup and recurring planned administrative costs related to the
Pennsylvania Brewery and legal costs.
Write-off of Brewery Costs. During the second quarter of 2007, the Company incurred a $3.4 million
write-off of capitalized costs related to the potential construction of a new brewery to be located
in Freetown, Massachusetts. The Company concluded that the likelihood of this project
significantly diminished as the Companys negotiations with Diageo North America progressed and
ultimately resulted in the Companys purchase of the Pennsylvania Brewery.
Total other income, net. Other income, net, decreased by $1.0 million to $1.4 million for the six
months ended June 28, 2008 as compared to the same period ended June 30, 2007. This decrease is
due to less interest earned on lower average cash and investment balances during the six months
ended June 28, 2008 as compared to the same period in 2007.
Provision for income taxes. The Companys effective tax rate increased to approximately 46.5% for
the six months ended June 28, 2008 from 41.4% for the same period last year. This increase in the
effective tax rate is primarily due to increased unfavorable permanent items, primarily due to
increased meals and entertainment as well as a reduced production activity benefit on a lower level
of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments decreased to $19.4 million as of June 28, 2008 from $95.5 million
as of December 29, 2007, primarily due to the acquisition of assets of the Pennsylvania Brewery,
purchases of property, plant and equipment and repurchases of common stock, partially offset by
cash flows provided by operating activities and proceeds from stock option exercises.
Cash flows provided by operating activities consist of net income, 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
provided by operating activities are changes in operating assets and liabilities, such as accounts
receivable, inventory, accounts payable and accrued expenses.
Cash flows provided by operating activities of $30.0 million for the six months ended June 28,
2008 primarily resulted from net income of $4.8 million, the sale of all of the Companys
remaining trading securities of $16.2 million and non-cash items of $4.4 million, partially offset
by a net increase in net operating assets and liabilities of $4.4 million. The net increase in
net operating assets and liabilities for the six months ended June 28, 2008 primarily resulted
from a $7.4 million increase in inventory due to the receipt of the 2007 hop crop and higher
general inventory levels in support of growth and the new brewery, and a $10.4 million increase in
accounts receivable due to increase in sales and the timing of cash collections in the period,
offset by a $12.5 million increase in accounts payable due to increased purchases to support
growth and for capital expenditures for the Pennsylvania Brewery and $2.3 million increase in
accrued expenses as a result of the provisions for product returns and costs associated with the
product recall. Cash flows provided by operating activities of $13.4 million for the six months
ended June 30, 2007 primarily consisted of net income of $12.6 million, and non-cash items of $6.5
million, including $3.4 million for
the write-off of brewery costs related to the Freetown Massachusetts brewery project, offset by a
net increase in net operating assets and liabilities of $4.2 million and net purchases of trading
securities of $1.5 million.
14
Comparing the six month periods ended June 28, 2008 and June 30, 2007, cash flows provided by
operating activities increased by $7.6 million primarily as a result of $17.7 million in increased
sales of trading securities, offset by a $7.8 million decrease in net income.
The Company used $71.5 million in investing activities during the six months ended June 28, 2008,
as compared to $8.5 million during the six months ended June 30, 2007. The $63.0 million increase
in investing activities primarily resulted from the remaining $45.0 million purchase price and
$18.8 million in equipment purchases for the Pennsylvania Brewery, as well as the purchase of a
greater number of kegs.
Cash used in financing activities was $9.4 million during the six months ended June 28, 2008, as
compared to $4.1 million of cash provided by financing activities during the six months ended June
30, 2007. The $13.4 million change in cash used for financing activities is primarily due to $15.3
million in repurchases of shares of its Class A Common Stock under its Stock Repurchase Program by
the Company.
During the six months ended June 28, 2008, the Company repurchased 0.4 million shares of its Class
A Common Stock for a total cost of $15.3 million. As of June 28, 2008, the Company has repurchased
a cumulative total of approximately 8.5 million shares of its Class A Common Stock for an aggregate
purchase price of $114.0 million and had approximately $6.0 million remaining on the $120.0 million
share buyback expenditure limit. Since June 28, 2008, the Company has not repurchased additional
shares of its Class A Common Stock.
During the six months ended June 28, 2008, the Companys available cash was primarily invested in
high-grade tax-exempt and taxable money-market funds. In January 2008, the Company liquidated its
then existing investments in Municipal Auction Rate Securities, without incurring gains or losses,
in order to fund various capital projects related to the acquisition of the Pennsylvania Brewery.
The Companys investment objectives are to preserve principal, maintain liquidity, optimize return
on investment and minimize fees, transaction costs and expenses associated with the selection and
management of the investment securities.
On March 10, 2008, the Company increased the borrowing limit under its credit facility from $20.0
million to $50.0 million and extended the expiration date of the credit facility from March 31,
2008 to 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.
The Company continues to estimate total capital expenditures in 2008 to be between $110.0 and
$125.0 million, of which $45.0 million was the balance of the purchase price for the Pennsylvania
Brewery that was paid to Diageo in June 2008, and $45.0 to $55.0 million relates to capital
expenditures necessary to restart and upgrade the Pennsylvania Brewery. The Companys capital
investments in 2008 would be significantly higher if other major brewery investment projects were
initiated.
During the third quarter of 2007, the Alcohol and Tobacco Tax and Trade Bureau of the U.S.
Treasury Department (the TTB) performed a routine audit of the Companys brewery in Cincinnati,
Ohio (the Cincinnati Brewery) and other breweries where some of the Companys products are
produced (the TTB Audit). In February 2008, the TTB formally disputed the Companys regulatory
and tax treatment of certain of its 2006 and 2007 Twisted Tea shipments and the Company received a
notice of demand for additional excise taxes plus interest and penalties of approximately
$8.5 million. The TTB has asserted that these shipments were not classified consistent with TTB
regulations that took effect January 1, 2006. Based on the Companys analysis, it believes that
most of its Twisted Tea shipments were in compliance with applicable regulations. Based on the
information previously collected and its earlier assessment of likely outcomes, the Company
recorded a provision of $3.9 million in the third quarter of 2007. The Company continues to
maintain this provision in its June 28, 2008 financial statements.
During the second quarter of 2008, the Company met with the TTB and presented its analysis of the
events identified by the TTB Audit. Settlement discussions are
underway. While it is too early to tell the final result, based on available information, the Companys provision of $3.9
million appears adequate to cover the cost of likely outcomes to the
Company. Based on
communications it has received from the TTB to date, the Company currently estimates that its
maximum possible exposure related to the issue raised by the TTB is approximately $8.5 million.
15
Based upon current projections, including the estimated expenditure related to the product recall,
the Company expects that its working capital of $8.5 million at June 28, 2008, cash flows from
operations and the credit facility should be sufficient to meet its short-term and long-term
operating and capital requirements.
2008 Outlook
The Company has adjusted full year volume targets down on account of the slower depletion trends
seen in the second quarter and it is evaluating the causes and working to maintain the brand
momentum it had prior to the recall. The Company continues to experience cost inflation, and
looking forward into 2009, the Company sees further significant cost pressures in cost of goods
sold and freight costs, due to agricultural pricing pressures, a new glass contract and rising
energy costs and is working to try to offset these impacts through efficiency gains. While the
Companys ability to achieve its financial goals for the year will be negatively impacted by the
cost of the recall and lower than plan depletion volumes, the outlook on full year earnings results
has not changed with the exception of the impact of the recall costs and its effect on the tax
rate. Including the impact of the recall, but without taking into account any potential
recoveries, the Company expects 2008 earnings per diluted share to be between $0.85 and $1.15. The
earnings per share range estimate does not include any significant change in currently planned
levels of brand support or any additional expenses above the current estimates for the startup and
upgrade of the Pennsylvania Brewery, the product recall or the $3.9 million excise tax provision
discussed above. The Companys ability to achieve this level of earnings in 2008 is dependent on
its ability to achieve challenging targets for volume, pricing and costs.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance Sheet Arrangements
At June 28, 2008, 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 Companys business to
contractual obligations during the six month period ended June 28, 2008. Notwithstanding the
foregoing, effective July 1, 2008, Diageo North America, Inc. assigned its rights and obligations
under the Packaging Services Agreement dated August 1, 2007 to its wholly-owned subsidiary, Diageo
Americas Supply, Inc. Similarly, effective July 1, 2008, Miller Brewing Company assigned its
rights and obligations under its agreements with the Company to the newly-formed joint venture,
MillerCoors LLC, which assignment and assumption by MillerCoors LLC were consented to by the
Company.
Critical Accounting Policies
There were no material changes to the Companys critical accounting policies during the six month
period ended June 28, 2008, except for the following:
Product Recall
Prior to announcing the voluntary product recall on April 7, 2008, the Company had not had a
significant product recall. The Company establishes reserves for product recalls on a
product-specific basis when circumstances giving rise to the recall become known. Facts and
circumstances related to any recall, including where the product affected by the recall is located
(for example, with wholesale, retail and consumers or in the Companys inventory) and cost
estimates for any fees and incentives to wholesalers for their effort to return the products,
freight and destruction charges for returned products, warehouse and inspection fees, repackaging
materials, point-of-sale materials and other costs are considered when establishing reserves for
product recall. These factors are updated and reevaluated each period and the related reserves are
adjusted when these factors indicate that the recall reserves are either insufficient to cover or
exceed the estimated product recall expenses.
Significant changes in the assumptions used to develop estimates for product recall reserves could
affect key financial information, including accounts receivable, inventories, net revenues, gross
profit, operating expenses and net income. In addition, estimating product recall reserves
requires a high degree of judgment in areas such as estimating the quantity of recalled products
not yet consumed, the allocation of recalled products sold to consumers and the portion held at
retail and
wholesale, incentives to be earned by wholesalers for their effort to return the products, future
freight rates, and the way in which drinkers might be compensated for their claims or affected
products they hold.
16
In connection with the recall announced in April 2008, the Company recorded an estimated accrual
for product returns of $9.1 million and an estimated accrual for recall-related costs of $4.2
million and wrote-off $1.7 million of affected inventory during the first quarter of 2008. During
the three months ended June 28, 2008, additional charges of $3.2 million for product returns,
$1.9 million
for recall-related costs and $0.4 million for inventory write-offs were recorded based on actual recall
activities and inventory counts during the
quarter and an estimate of remaining activities to be incurred. The Company believes that its reserves for the product recalls at June 28, 2008 are
adequate and appropriate. However, due to the high degree of judgment involved in making such
estimates, actual returns and costs may be different from the reserves. Consequently, the reserves
for the product recall may not be sufficient to cover such losses.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. In February 2008, the FASB issued Staff Position (FSP) No. 157-2, delaying the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities. The Company
adopted the provisions of SFAS No. 157 related to financial assets and liabilities and items that
are recognized at fair value on a recurring basis on December 30, 2007, the first day of its 2008
fiscal year. The partial adoption of SFAS No. 157 related to financial assets and financial
liabilities did not have an effect on the Companys consolidated financial position, operations and
cash flows for the three and six months ended June 28, 2008.
As permitted by FSP No. 157-2, the Company will not apply the provisions of SFAS No. 157 to the
following items until 2009: property, plant and equipment and goodwill. The Company is in the
process of evaluating the impact of the deferred provisions of SFAS No. 157 on its 2009
consolidated financial position, operations and cash flows.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R), which
applies to all plan sponsors who offer defined benefit postretirement plans. SFAS No. 158 requires
recognition of the funded status of a defined benefit postretirement plan in the statement of
financial position and expanded disclosures in the notes to financial statements. The Company
adopted this provision for the year ended December 30, 2006 and the adoption did not have a
material impact on its consolidated financial position. In addition, SFAS No. 158 requires
measurement of plan assets and benefit obligations as of the date of the plan sponsors fiscal year
end. The Company is required to adopt the measurement provision of SFAS No. 158 for its fiscal
year ending December 27, 2008. The Company does not believe the measurement provision of SFAS No.
158 to have a material effect on its 2008 consolidated financial position, operations and cash
flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 permits
companies to choose to measure many financial instruments at fair value, that are not currently
required to be measured at fair value, at specified election dates under its fair value option.
Unrealized gains and losses on items for which the fair value option has been elected are reported
in earnings at each subsequent reporting date. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. The Company adopted the
provisions of SFAS No. 159 in the first quarter of 2008, but did not elect the fair value option
for any of its financial assets and financial liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised) (SFAS No. 141R), Business Combinations,
which replaces SFAS No 141, Business Combinations. SFAS No. 141R will significantly change the
accounting for business combinations and an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. In addition to new financial statements disclosures, SFAS No. 141R will also
change the accounting treatment for certain specific items, including the expensing of acquisition
costs and restructuring costs associated with a business combination, and changes in deferred tax
asset valuation allowances and income tax uncertainties after the acquisition date which generally
will affect income tax expense. SFAS No. 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the Companys fiscal 2009 period, with
the exception of the accounting of valuation allowances on deferred tax assets and acquired tax
contingencies for which the adoption is retrospective. The Company is in the process of evaluating
the impact of SFAS No. 141R, if any, on its consolidated financial position, operations and cash
flows.
17
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. This Statement is effective 60 days
following the Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is in the process of evaluating the impact,
if any, of the provisions of SFAS No. 162 on its consolidated financial position, operations and
cash flows.
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 Companys future plans of operations, business strategy,
results of operations and financial position. These statements are based on the Companys 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 Companys Annual Report on Form 10-K for the year ended December 29, 2007.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 29, 2007, there have been no significant changes in the Companys 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 June 28, 2008, the Company conducted an evaluation under the supervision and with the
participation of the Companys management, including the Companys 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 Companys 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 Companys 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 Companys internal control over financial reporting that occurred
during the quarter ended June 28, 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be, subject to legal proceedings
and claims in the ordinary course of its business. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. Currently, the Company is not a
party to any material pending or threatened litigation.
Item 1A. RISK FACTORS
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 Companys Annual Report on
Form 10-K for the year ended December 29, 2007, which could materially affect the Companys
business, financial condition or future results. The risks described in the Companys 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.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 13, 2008, the Board of Directors of the Company increased the aggregate expenditure
limit for the Companys Stock Repurchase Program by $10.0 million, thereby increasing the limit
from $110.0 million to $120.0 million. As of August 1, 2008, the Company has repurchased a
cumulative total of approximately 8.5 million shares of its Class A Common Stock for an aggregate
purchase price of $114.0 million and had $6.0 million remaining on the $120.0 million share buyback
expenditure limit.
During the six months ended June 28, 2008, the Company repurchased 429,716 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 30, 2007 to February 2, 2008 |
|
|
277,100 |
|
|
$ |
35.62 |
|
|
|
277,100 |
|
|
$ |
1,442,079 |
|
February 3, 2008 to March 1, 2008 |
|
|
83,000 |
|
|
|
36.84 |
|
|
|
83,000 |
|
|
|
8,384,675 |
|
March 2, 2008 to March 29, 2008 |
|
|
68,679 |
|
|
|
34.89 |
|
|
|
68,679 |
|
|
|
5,988,751 |
|
March 30, 2008 to May 3, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,988,751 |
|
May 4, 2008 to May 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,988,751 |
|
June 1, 2008 to June 28, 2008 |
|
|
937 |
|
|
|
22.41 |
|
|
|
|
|
|
|
5,988,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
429,716 |
|
|
$ |
35.71 |
|
|
|
428,779 |
|
|
$ |
5,988,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the current period, the Company repurchased 937 shares of unvested investment shares issued
under the Investment Share Program of the Companys Employee Equity Incentive Plan.
As of
August 1, 2008, 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
19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 23, 2008. The following items were
voted upon by the holders of the Companys Class A Common Stock at that time:
RESOLVED: That David A. Burwick, Pearson C. Cummin, III and Jean-Michel Valette be and they hereby
are elected Class A Directors of the Corporation to serve for a term of one year ending on the date
of the 2009 Annual Meeting of Stockholders in accordance with the By-Laws and until their
respective successors are duly chosen and qualified.
The results of the vote were as follows:
Election of Class A Directors:
|
|
|
|
|
|
|
|
|
|
|
For |
|
|
Withheld |
|
David A. Burwick |
|
|
8,566,386 |
|
|
|
333,070 |
|
Pearson C. Cummin, III |
|
|
7,812,291 |
|
|
|
1,087,165 |
|
Jean-Michel Valette |
|
|
8,490,315 |
|
|
|
409,141 |
|
Election of Class B Directors:
Mr. C. James Koch, as the sole holder of the Corporations Class B Common Stock, elected the five
Class B Directors set forth in the Notice of Meeting and Proxy Statement; namely: C. James Koch,
Charles Joseph Koch, Jay Margolis, Martin F. Roper and Gregg A. Tanner, each to serve a term of one
year. The Class B Stockholder also formally reserved the right to increase the number of Class B
Directors to up to six Directors, as permitted under the Corporations By-Laws, at such time as he
deems appropriate, and to elect up to one additional Class B Director.
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS
|
|
|
Exhibit No. |
|
Title |
|
|
|
11.1
|
|
The information required by Exhibit 11 has been included in
Note D 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. |
|
|
|
* |
|
Filed with this report. |
20
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: August 5, 2008 |
/s/ Martin F. Roper
|
|
|
Martin F. Roper |
|
|
President and Chief Executive Officer
(principal executive officer) |
|
|
|
|
Date: August 5, 2008 |
/s/ William F. Urich
|
|
|
William F. Urich |
|
|
Chief Financial Officer
(principal accounting and financial officer) |
|
|
21
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
|
|
|
11.1
|
|
The information required by Exhibit 11 has been included in Note D 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. |
|
|
|
* |
|
Filed with this report. |
22