Business Context and Reporting Period
Company: The Boston Beer Company, Inc. (Samuel Adams, Twisted Tea, HardCore Cider)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 26, 2009 (Three and Nine Months)
Comparison Period: September 27, 2008
The Company reported strong operational performance in the third quarter of 2009, driven by price increases and lower operating costs, despite a decline in total shipment volume due to the termination of a contract packaging agreement with Diageo. The Company maintains a strong liquidity position with no outstanding debt.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 26, 2009 |
3 Months Ended Sept 27, 2008 |
9 Months Ended Sept 26, 2009 |
9 Months Ended Sept 27, 2008 |
|---|---|---|---|---|
| Net Revenue | $108,722 | $101,128 | $307,865 | $294,623 |
| Gross Profit | $58,305 | $43,891 | $158,325 | $135,342 |
| Gross Margin % | 53.6% | 43.4% | 51.4% | 45.9% |
| Operating Income | $17,180 | $519 | $41,384 | $8,076 |
| Net Income | $10,374 | $(295) | $23,658 | $4,491 |
| Diluted EPS | $0.72 | $(0.02) | $1.65 | $0.31 |
| Cash & Equivalents | $44,802 (as of Sept 26, 2009) | |||
| Operating Cash Flow (9mo) | $48,548 | $27,171 | ||
| Debt | $0 (No borrowings on $50M line of credit) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 7.5% in Q3 and 4.5% for the nine months ended Sept 26, 2009. This growth was driven by a 3.8% increase in net selling price per barrel for core brands, offsetting a 18.8% decline in total shipment volume in Q3.
- Volume Dynamics: Total shipment volume decreased primarily due to the termination of the Diageo Packaging Services Agreement in May 2009. However, core brand shipment volume increased 7.4% in Q3, driven by Samuel Adams Seasonals, Brewmaster's collection, and Twisted Tea.
- Profitability Expansion: Gross margin for core products improved significantly to 53.8% in Q3 2009 from 46.7% in Q3 2008. This was due to price increases and lower costs per barrel (lower energy costs), excluding the impact of the 2008 product recall.
- Expense Management: Advertising, promotional, and selling expenses decreased 3.8% in Q3 and 11.3% for the nine months, largely due to reduced freight costs from lower fuel prices and more efficient marketing spend.
- Product Recall Impact: The 2008 voluntary product recall negatively impacted 2008 comparables. The 2009 results are not materially affected by recall costs, whereas 2008 results included significant recall-related charges.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2009 EPS Guidance: The Company projects 2009 earnings per diluted share between $1.75 and $2.05, based on an expectation that 2009 depletions will increase 2% to 3% compared to 2008.
- 2009 Capital Expenditures: Expected to be between $14.0 million and $18.0 million, including carryover projects for the Pennsylvania Brewery.
- 2010 Outlook: The Company aims to increase revenue per barrel by 2% in 2010. It forecasts stable packaging/ingredient costs and continued operating cost improvements at the Pennsylvania Brewery. Initial 2010 capital expenditure estimates are $15.0 million to $25.0 million.
- Capacity: Management believes current capacity can support growth in excess of 10% in 2010 without significant expansion.
Risks and Contingencies
- Rochester Brewery Contract: Ownership of the High Falls brewery in Rochester, NY changed in Feb 2009. The new owners did not assume the existing contract, and brewing ceased in April 2009. The Company is negotiating new terms but does not expect a material impact on meeting demand.
- Tax Audits: The Company is subject to examinations by the Massachusetts Department of Revenue (years 2004-2008) and the IRS (2008 return). It is reasonably possible that unrecognized tax benefits may change significantly, though no material impact is currently expected.
- Supply Commitments: The Company has non-cancelable purchase commitments for hops ($42.7 million) and advertising ($16.2 million).
Investor Verification Checklist
- Volume vs. Price Mix: Verify if the 7.4% core volume growth in Q3 is sustainable given the 18.8% total volume decline caused by the loss of Diageo contract volume.
- Cost Inflation: Monitor the impact of rising package material costs, which partially offset lower energy costs in the nine-month period.
- Rochester Brewery Resolution: Track the status of negotiations with the new owners of the Rochester Brewery to ensure no disruption to production capacity.
- Tax Liability: Review the outcome of the ongoing Massachusetts and IRS tax audits regarding unrecognized tax benefits.
- Share Repurchases: Note the Company has $21.9 million remaining on its $140 million share buyback program and has been actively repurchasing Class A stock.