SAM

Business Context and Reporting Period

Company: The Boston Beer Company, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 25, 2005
Business Overview: The Company brews and sells malt beverages and cider products, primarily under the Samuel Adams, Twisted Tea, and HardCore trademarks, in the United States and select international markets.

Key Financial Metrics

(All figures in thousands, except per share data)

Liquidity: Working capital was $63.9 million. The Company maintains a $20.0 million credit facility with no amounts outstanding as of June 25, 2005.

Material Changes vs. Prior Period

• Revenue: Net revenue decreased 0.6% in the quarter ($61.6M vs. $62.0M) due to a 2.8% decline in shipment volume, partially offset by a 2.2% increase in net selling price. For the six months, net revenue increased 3.4% ($110.3M vs. $106.7M) driven by price increases and a 1.1% volume increase.
• Volume: Core brand volumes (Samuel Adams Boston Lager, Sam Adams Light) declined, while Twisted Tea, Seasonal Brands, and Brewmaster's Collection grew.
• Costs: Cost of goods sold increased 3.7% per barrel in the quarter due to product mix shifts and higher packaging costs. Advertising, promotional, and selling expenses were relatively flat for the quarter but decreased 4.1% for the six months due to reduced advertising spend.
• Profitability: Operating income decreased 9.3% in the quarter ($7.9M vs. $8.7M) but increased 31.8% for the six months ($13.9M vs. $10.5M). Net income decreased 4.1% in the quarter but increased 37.3% for the six months.
• Capital Expenditures: Purchases of property, plant, and equipment increased significantly to $7.0 million for the six months ended June 25, 2005, compared to $2.1 million in the prior year period, primarily for the Cincinnati brewery expansion.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year 2005 gross profit percentage to be approximately 60.5%, assuming stable product mix. Brand support spending is expected to increase by $3.0 to $5.0 million over 2004 levels. Capital expenditures for 2005 are projected between $12.0 million and $15.0 million.
• Forward-Looking Indicators: Shipments and orders suggest core shipments for July and August 2005 could be up approximately 11% compared to the same period in 2004.
• Stock Repurchase: The Board increased the stock repurchase program limit to $100.0 million. As of August 2, 2005, $20.0 million remained available.
• Legal Proceedings: The Company is a defendant in class action lawsuits regarding advertising practices and underage consumption. Additionally, a dispute exists with its liability insurer (Royal Indemnity Company) regarding coverage for these actions. The Company does not currently expect these matters to have a materially adverse effect.
• Accounting Changes: The Company intends to adopt SFAS No. 123R (Share-Based Payment) in fiscal year 2006, which will require recognizing stock compensation expense based on fair value.

Investor Verification Checklist

• Volume Trends: Verify the sustainability of volume growth in Twisted Tea and seasonal brands versus the decline in core Samuel Adams products.
• Capital Expenditure Execution: Monitor the completion of the Cincinnati brewery expansion and its impact on future production capacity and costs.
• Legal Exposure: Track the status of the class action lawsuits and the insurance coverage dispute with Royal Indemnity Company.
• Accounting Impact: Assess the potential impact of adopting SFAS No. 123R on future net income and EPS in fiscal 2006.
• Input Costs: Monitor the impact of forward hop contracts (denominated in euros) and packaging material costs on gross margins.