SAM

Business Context and Reporting Period

Company: The Boston Beer Company, Inc. (NYSE: SAM)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 26, 2009 (52 weeks)
Business Overview: The largest craft brewer and largest independently-owned brewer in the United States. The Company operates in the "Better Beer" category, primarily marketing Samuel Adams® beers, Twisted Tea® flavored malt beverages, and HardCore® hard cider. Operations include three company-owned breweries (Boston, Cincinnati, Pennsylvania) and contract brewing arrangements.

Key Financial Metrics

Note: 2008 results were significantly impacted by a voluntary product recall ($22.7 million pre-tax charge) and a TTB tax settlement.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 4.2% to $415.1 million. Excluding the negative impact of the 2008 product recall, organic revenue growth was approximately 1.0%.
• Volume Decline: Total shipment volume decreased 5.1% to 2.22 million barrels. Core brand shipments declined 1.5%, while non-core (contract) shipments dropped 42.3% due to the termination of a packaging services agreement with Diageo.
• Margin Expansion: Gross margin improved to 51.5% from 46.1%. This increase is largely attributable to price increases taken in 2009 and the absence of the 2008 recall costs ($9.5 million in COGS).
• Profitability Surge: Net income increased nearly 285% to $31.1 million, driven by higher gross margins, reduced operating expenses (advertising and selling expenses decreased 8.5%), and the absence of 2008 recall charges.
• Liquidity Improvement: Cash and cash equivalents rose from $9.1 million to $55.5 million, bolstered by strong operating cash flows and a reduction in capital expenditures compared to the heavy investment year of 2008.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• 2010 Guidance: Management targets diluted earnings per share between $2.35 and $2.65. They project gross margins of approximately 54% and an effective tax rate of 42%.
• Revenue Per Barrel: Expectations for revenue per barrel increases have been reduced to 1-2% due to a challenging competitive pricing environment.
• Investment: Plans to increase brand investment by $5.0 million to $10.0 million in 2010.
• Recent Performance: Year-to-date depletions through February 2010 were up approximately 9% compared to the prior year.

Risks and Contingencies

• Legal Proceedings: In February 2010, the Company filed a Demand for Arbitration against the new and previous owners of the Rochester Brewery regarding breach of contract and wrongful interference. The outcome is uncertain.
• Supply Chain: The Company has significant purchase commitments for hops ($32.4 million) denominated in Euros and British Pounds Sterling, creating foreign currency exposure. The Company does not currently hedge these commitments.
• Competition: Intense competition in the "Better Beer" category from major brewers (AB InBev, MillerCoors) and imports (Heineken, Corona). Heineken's acquisition of FEMSA Cerveza was noted as a significant competitive development.
• Product Recall History: While the 2008 recall was substantially completed, the Company notes ongoing risks related to product contamination and the potential for future recalls.

Investor Verification Checklist

• Volume vs. Price Mix: Verify if the 1.0% organic revenue growth is sustainable given the 1.5% decline in core shipment volume.
• 2010 EPS Target: Assess the feasibility of the $2.35–$2.65 EPS target given the reduced revenue per barrel guidance and planned increase in marketing spend.
• Rochester Brewery Arbitration: Monitor the status of the arbitration regarding the Rochester Brewery contract dispute for potential financial impact or capacity constraints.
• Foreign Currency Exposure: Evaluate the impact of Euro and Pound Sterling fluctuations on the $32.4 million in hops purchase commitments.
• Capital Allocation: Review the remaining $18.9 million (as of Dec 2009) and subsequent increases to the $165 million stock repurchase program limit.