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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-K

(Mark One)

☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2016

28, 2019

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES 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)

Massachusetts 04-3284048

Massachusetts
04-3284048
(State or other jurisdiction of


incorporation or organization)

 

(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

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading
Symbol(s)
Name of each exchange
on which registered

Class A Common StockStock. $0.01 par value
 NYSE
SAM
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐
☒
    No  ☒

☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  
☐
    No  
☒

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  
☒
    No
☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.files).    Yes  
☒
No  
☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationsS-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.    ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or anon-acceleratedan emerging growth company. See the definitions of “large accelerated filer, (as defined” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act)

Act.
Large accelerated filer
 
☒
 
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
 ☐
Non-accelerated filer 
Emerging growth company
☐
  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
☐
    No  ☒

The aggregate market value of the Class A Common Stock ($.01 par value) held by
non-affiliates
of the registrant totaled $1,396.1$3,163.5 million (based on the average price of the Company’s Class A Common Stock on the New York Stock Exchange on June 25, 2016)29, 2019). All of the registrant’s Class B Common Stock ($.01 par value) is held by an affiliate.

As of February 17, 2017,14, 2020, there were 9,306,471shares9,481,434
shares outstanding of the Company’s Class A Common Stock ($.01 par value) and 3,197,3552,672,983 shares outstanding of the Company’s Class B Common Stock ($.01 par value).

DOCUMENTS INCORPORATED BY REFERENCE

Certain parts of the registrant’s definitive Proxy Statement for its 20172020 Annual Meeting to be held on May 18, 201714, 2020 are incorporated by reference into Part III of this report.

Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

FORM
10-K

FOR THE PERIOD ENDED DECEMBER 31, 2016

28, 2019
PART I.
Page
Item 1.
Business
3
Item 1A.
Risk Factors
15
Item 1B.
Unresolved Staff Comments
24
Item 2.
Properties
25
Item 3.
Legal Proceedings
26
Item 4.
Mine Safety Disclosures
26
    Page 
PART I.II.
  

Item 1.

Business

  1

Item 1A.

Risk Factors

  11 

Item 1B.

5.
 

Unresolved Staff Comments

21

Item 2.

Properties

21

Item 3.

Legal Proceedings

22

Item 4.

Mine Safety Disclosures

22
PART II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  22
26
 

Item 6.

 

Selected Consolidated Financial Data

  25
29
 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  25
29
 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  37
38
 

Item 8.

 

Financial Statements and Supplementary Data

  38
40
 

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

  69
77
 

Item 9A.

 

Controls and Procedures

  69
77
 

Item 9B.

 

Other Information

  71
80
 
PART III.
  

Item 10.

 

Item 10.
Directors, Executive Officers and Corporate Governance

  71
81
 

Item 11.

 

Executive Compensation

  71
81
 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  71
81
 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  72
82
 

Item 14.

 

Principal AccountantAccounting Fees and Services

  72
82
 
PART IV.
  

Item 15.

Exhibits and Financial Statement Schedules

  72

Item 16.

Form 10-K Summary

  74
Item 15.
Exhibits, Financial Statement Schedules
83
 
Item 16.
Form 10-K Summary
85
Signatures
   75
86
 

2

Table of Contents
PART I.

Item 1.Business

General

The Boston Beer Company, Inc. (“Boston Beer” or the “Company”) is a
high-end
alcoholic beverage company and one of the largest craft brewers in the United States. In fiscal 2016,2019, Boston Beer sold approximately 4.05.3 million barrels of its proprietary products
.

During 2016, the Company sold over sixty beers under the

The Company’s brands include Samuel Adams
®
, Twisted Tea
®
, Truly Hard Seltzer
®
, Angry Orchard
®
Hard Cider, Dogfish Head
®
Craft Brewery, Wild Leaf
®
Hard Tea and the Sam AdamsTura
® brand names, over twenty hard cider beverages under the Angry Orchard® brand name, thirteen flavored malt beverages under the Twisted Tea® brand name, four hard seltzer beverages under the Truly Spiked & Sparkling™ brand name, and over forty beers under four of the brand names of its subsidiary, A&S Brewing Collaborative LLC, under the tradename A&S Brewing.

Alcoholic Kombucha, as well as other local craft beer brands.
Boston Beer produces alcohol beverages including malt beverages (“beers”), hard ciderseltzer and hard seltzercider at Company-owned breweries and its cidery and under contract arrangements at other brewery locations. The Samuel Adamsfour primary Company-owned breweries are focused on production and research and development and include breweries located in Boston, Massachusetts (the “Boston Brewery”), Cincinnati, Ohio (the “Cincinnati Brewery”), Milton, Delaware (the “Milton Brewery”) and Breinigsville, Pennsylvania (the “Pennsylvania Brewery”). These breweries, with the exception of the Pennsylvania Brewery, have tap rooms for retail sales on site. The A&S Brewing Company-ownedCompany produces a small amount of distilled spirits at the Milton Brewery.
The Company also owns five smaller local breweries that are mainly focused on brewing and packaging beers for retail sales on site at tap rooms and gift shops, restaurant activities, developing innovative and traditional beers and in some cases, supporting draft and package accounts in the respective local market areas. These local breweries are located in Boston, Massachusetts (the “Samuel Adams Boston Downtown Tap Room”), Rehoboth, Delaware ( “Dogfish Head Brewing and Eats”), Los Angeles, California (the “Angel City Brewery”), Miami, Florida (the “Concrete Beach Brewery”) and Brooklyn, New York (the “Coney Island Brewery”). The
In addition, the Company owns an apple orchard and cidery located in Walden, New York (the “Orchard” and “Cidery”), a restaurant in Rehoboth, Delaware (“Chesapeake & Maine”) and a boutique inn in Lewes, Delaware (the “Dogfish Inn”).

The Company’s principal executive offices are located at One Design Center Place, Suite 850, Boston, Massachusetts 02210, and its telephone number is (617)
368-5000.

Industry Background

Before Prohibition, the United States beer industry consisted of hundreds of small breweries that brewed full-flavored beers. After the end of Prohibition, most domestic brewers shifted production to less flavorful, lighter beers, which use lower-cost ingredients, and can be mass-produced to take advantage of economies of scale in production. This shift towards mass-produced beers coincided with consolidation in the beer industry. Today,industry that by 2008 ultimately resulted in the two major brewers,largest breweries, Anheuser-Busch InBev (“AB InBev”) and MillerCoors LLCMolson Coors Beverage Company (“MillerCoors”Molson Coors”), comprisecomprising over 80%90% of all United States domestic beer production, excluding imports.

During the last twenty years the number of breweries in the United States has increased significantly from approximately 1,500 in 2009 to over 8,000 in 2019. Most of these new breweries are craft (small and independent) brewers. The rise of craft breweries along with the growth of imported beers has resulted in a significant decline in the volume of the two largest breweries who now comprise approximately 70% of all United States domestic beer production, excluding imports.

The Company’s beers, hard seltzers and hard ciders are primarily positioned in the Better Beer category of themarket for High End beer industry, which includesoccasions. The Company defines “High End” beers as including craft (small, independent and traditional) brewers,beers, domestic specialty beers, most imported beer, hard cider, flavored malt beverages and most imports. Better Beershard seltzer that are called for by a High End beer drinker occasion. High End beers and beer occasions (the “High End category”) are determined by higher price, quality, image and taste, as compared with regular domestic beers. Samuel AdamsThis category has seen high single-digit compounded
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annual growth over the past ten years. The Company believes that the High End category is positioned to increase market share, as drinkers continue to trade up in taste and quality. Boston Beer is one of the largest brandssuppliers in the Better BeerHigh End category ofin the United States brewing industry. The Company’s A&S Brewing brands, which include the Traveler Beer Co.®, the Angel City Brewing Company®, the Concrete Beach Brewery® and the Coney Island® Brewing Company also compete in the Better Beer category.States. The Company estimates that in 20162019 the Better BeerHigh End category percentage volume growth was approximately 6%11%, with the craft beer category volume growth approximately 7%5%, and total beer category volume essentially flat. growth approximately 2%.
The Company believes that the Better BeerHigh End category is approximately 29%now over 30% of the United States beer consumption by volume.

market and the Company has approximately an 8% market share of the High End category.  

The domestic beer industry, excluding Better Beers,the High End category, has experienced a decline in shipment volume over the last tentwenty years. The Company believes that this decline is due to declining alcohol consumption per person in the population, drinkers trading up to drink high quality, more flavorful beers, health and wellness trends and increased competition from wine and spirits companies.

The Company’s Twisted Tea products compete within the flavored malt beverage (“FMB”) category of the beer industry (and the Company’s Twisted Tea products are included in generic references to the Company’s “beers” in this report). The Company believes that the FMB category comprises approximately 4% of United States beer

consumption and that the volume comprising the FMB category grew approximately 5%2% in 2016.2019. This category is highly competitive due to, among other factors, the presence of large brewers and spirits companies in the category the advertising of malt-based spirits brands in channels not available to the parent brands and a fast pace of product innovation.

The Truly Hard Seltzer brand competes within the hard seltzer category that has similar characteristics to the beer industry for reporting and regulatory purposes. This category is growing rapidly in its early stages of development over the last 4 years and is highly competitive and includes large international and domestic competitors. The Company believes that the hard seltzer category comprises approximately 3% of United States beer consumption and estimates that category volume grew approximately 250% in 2019.
The Company’s Angry Orchard ciders compete within the hard cider category that has similar characteristics to the beer industry for reporting and regulatory purposes.industry. The Company believes that the hard cider category comprises less than 1% of United States beer consumption. This category is small and highly competitive and includes large international and domestic competitors, as well as many small regional and local hard cider companies. The hard cider category experienced very fast growth until a slowing beginning in 2015, a return to growth in 2018 and a decline in 2019. The Company estimates the category volume decreaseddeclined approximately 12%5% in 2016.

The Company’s Coney Island Hard Sodas and Truly Spiked & Sparkling beverages compete within the hard soda and hard seltzer categories, respectively, and these categories have similar characteristics to the beer industry for reporting and regulatory purposes. These categories are small, in their early stages of development, highly competitive and include large international and domestic competitors. The Company’s Coney Island Hard Sodas and Truly Spiked & Sparkling beverages are included in generic references to the Company’s “beers” in this report. The Company launched Coney Island Hard Root Beer nationally during the second half of 2015 and Truly Spiked & Sparkling in the second half of 2016. The Company believes the hard soda category comprises less than 0.5% of United States beer consumption and that the volume comprising this category increased in 2016 because of full year availability, but, as best as can be determined, declined in the fourth quarter. The Company believes the hard seltzer category grew in 2016 due to new entrants and expanded distribution, but still comprises less than 0.1% of United States beer consumption and may have significant seasonality.

2019.

Description of Business

The Company’s business goal is to become the leading supplier in the Better BeerHigh End category and the other categories where it competes by creating and offering high quality full-flavored alcohol beverages. With the support of a large, well-trained sales organization and world-class brewers, the Company strives to achieve this goal by offering great beers, hard cidersseltzers and hard seltzers,ciders, and increasing brand availability and awareness through traditional media and digital advertising,
point-of-sale,
promotional programs and drinker education.

Beers,

The Company’s Dogfish Head Brewery Transaction
On May 8, 2019, the Company entered into definitive agreements to acquire Dogfish Head Brewery (“Dogfish Head”) and various related operations (the “Transaction”), through the acquisition of all of the equity interests held by certain private entities in
Off-Centered
Way LLC, the parent holding company of the Dogfish Head operations. In accordance with these agreements, the Company made a payment of $158.4 million, which was placed in escrow pending the satisfaction of certain closing conditions. The Transaction closed on July 3, 2019, for total consideration of $336.0 million consisting of $173.0 million in cash and 429,291 shares of restricted Class A Common Stock that had an aggregate market value as of July 3, 2019 of $163.0 million, after taking into account a post-closing cash related adjustment. As required under the definitive agreements, 127,146 of the 429,291 shares of restricted Class A Stock were placed in escrow and will be released no later than July 3, 2029.
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These shares had a market value on July 3, 2019 of $48.3 million. The timing of the release of these escrowed shares is primarily related to the continued employment with the Company of Samuel A. Calagione III, one of the two Dogfish Head founders. As part of the transaction, distribution rights to the Dogfish Head brand outside of the United States and Canada were retained by the Dogfish Head founders. The fair value of the Transaction is estimated at approximately $317.7 million.
The results of operations from Dogfish Head have been included in the Company’s consolidated statements of operations since the July 3, 2019 Transaction closing date. During the period from July 3, 2019 to December 28, 2019, Dogfish Head represented $48.5 million of the Company’s total revenue and $4.8 million of total net income. The Company estimates that transaction-related and other
non-recurring
costs incurred and to be incurred as a result of the Transaction will total approximately $12.0 million. Of this total, $10.0 million had been expensed as of December 28, 2019 and consists of $3.3 million in transaction costs and $6.7 million in other
non-recurring
costs. Of the $10.0 million costs incurred, $7.8 million were recorded in general and administrative expense and $2.2 million were recorded in cost of goods sold within in the accompanying statements of comprehensive income
Consistent with prior periods and considering post-merger reporting structures, the Company will continue to report as one operating segment. The combined Company’s brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and through the same channels of distribution.
The Company’s Beer, Hard CidersSeltzer and Hard Seltzers Marketed

Cider Business

The Company’s beers, hard seltzers and hard cider are sold by the Company’s sales force to the same types of customers and drinkers in similar size quantities, at similar price points and through substantially the same channels of distribution. These beverages are manufactured using similar production processes, have comparable alcohol content and generally fall within the same regulatory environment.
The Company’s strategy is to create and offer a world-class variety of traditional and innovative alcohol beverages, with abeverages. The Samuel Adams, Twisted Tea, Truly Hard Seltzer, Angry Orchard brands are all available nationally, while Dogfish Head is currently available in over 45 states and is expected to be available nationally during the first half of 2020. Local breweries brands focus on promoting thelocal and regional distribution and tap rooms. The Samuel Adams brand but supported bybegan in 1984 and the brand is recognized as one of the largest and most respected craft beer brands with a portfolioparticular focus on lagers and seasonal beers. The Twisted Tea brand family has grown each year since the product was first introduced in 2001 and has established a loyal drinker following. In 2016, the Company began national distribution of complementary brands.the Truly Hard Seltzer brand and it maintained its place as one of the leading brands in the hard seltzer category in 2019. The Angry Orchard brand family was launched in the second half of 2011 in several markets and achieved national distribution in 2012. Since 2013, Angry Orchard has been the largest selling hard cider in the United States. The Twisted TeaDogfish Head brand family has grown each year since the product was first introduced in 2001 and has established a loyal drinker following. In 2016, the Company began national distributionis recognized as one of the Truly Spiked & Sparkling brandmost innovative and it securedrespected craft beer brands with a leading position in the category during 2016. The Company’sparticular focus on India Pale Ales (“IPAs”) and sour beers. A&S Brewing subsidiary currently has fourhad three brands includingin 2019, Angel City The Traveler Beer Co.
®
, Coney Island
®
and Concrete Beach.

Beach

®
.
The Company sells its beverages in various packages. Kegs are sold primarily for
on-premise
retailers, which include bars, restaurants, stadiums and other venues,venues. Bottles, traditional cans and bottles andsleek cans are sold primarily for
off-premise
retailers, which include grocery stores, club stores, convenience stores and liquor stores.

The Company offers over 20 styles of beer in the Samuel Adams brand family and the brand is recognized for helping launch the craft beer industry. Samuel Adams Boston Lager
®
is the Company’s flagship beer that was first introduced in 1984. The Samuel Adams Seasonal program of beers was originally introduced in the late 1980’s and early 1990’s. These beers are brewed specifically for limited periods of time and in 20162019 included Samuel Adams Cold Snap
®
, Samuel Adams Summer Ale, Samuel Adams OctoberFest, and Samuel Adams
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Winter Lager. InThe majority of the early partpromotional and distribution efforts for the Samuel Adams brand family are focused on Samuel Adams Boston Lager and the Samuel Adams Seasonal program of beers in various bottle, can and keg packages. After some test launches in late 2017, the Company added two new seasonals tobegan the seasonal program to replace Samuel Adams

Cold Snap. These two new beers include:national launch in the first quarter of 2018 of Samuel Adams Hopscape, for JanuarySam ’76, a revolutionary beer that is a uniquely flavorful lager. Later in 2018 and February 2017,on a more limited basis, the Company launched Samuel Adams New England IPA, a hazy unfiltered IPA with citrusy hop flavor. Sam ’76 and Samuel Adams FreshNew England IPA are viewed as Helles,important innovations and opportunities for February, March and April 2017.

sales volume growth within the Samuel Adams brand family.

Certain Samuel Adams beers may be produced only at select times during the year and solely for inclusion in the Company’s seasonal variety packs. During 2016, Samuel Adams Escape Route®, Samuel Adams Noble Pils, Samuel Adams Scotch Ale and Samuel Adams Session Ale were brewed and included in the Spring variety pack, Samuel Adams Belgian Session, Samuel Adams Got to Gose, Samuel Adams Heaven or Helles and Samuel Adams Whitewater IPA were brewed and included in the Summer variety pack, Samuel Adams Bonfire Blonde, Samuel Adams Hoppy Red, Samuel Adams Maple Ale and Samuel Adams Toasted Caramel Bock were brewed and included in the Fall variety pack, Samuel Adams Chocolate Bock, Samuel Adams Ginger Beer, Samuel Adams Hopflake White IPA and Samuel Adams Old Fezziwig® Ale were brewed and included in the Winter Classics variety pack.packs that are available nationally. Additionally, beginning in 2011 the Company began limited releases of certain seasonal beers in various packages.beers. In 2016,2019, these limited seasonal release beers included Samuel Adams Crystal Pale Ale,Bavarian Lager, Samuel Adams Porch Rocker
®
, Samuel Adams Twenty Pounds of PumpkinKosmic Sour and Samuel Adams White Christmas.

After being in test markets during 2013, the Company began a national rollout of Samuel Adams Rebel® IPA, a West Coast style IPA brewed with hops from the Pacific Northwest, in early 2014. Since the national rollout, the Company has added additional styles to support Samuel Adams Rebel IPA, including Samuel Adams Rebel Grapefruit IPA, Samuel Adams Rebel Juiced IPA, Sam Adams Rebel Rouser® IPA and Samuel Adams Rebel Raw® IPA. In early 2016, the Company introduced Samuel Adams Rebel IPA Pack of Rebels which includes Samuel Adams Rebel Cascade IPA which is exclusive to this variety pack. In early 2017, the Company introduced a reformulation and new packaging of its original Samuel Adams Rebel IPA. The ‘Rebel Reborn’ reformulation includes experimental hops that create a more tropical and piney IPA and is being launched nationally during the first quarter of 2017.

The Samuel Adams Brewmaster’s Collection isand Samuel Adams Rebel

®
IPA family include various styles of beer that are an important part of the Company’s portfolio and heritage, but receivescurrently receive limited promotional support. The Samuel Adams Nitro Project was launched in 2016support and included three styles for most of 2016 that were available nationally. The Barrel Room Collection and Limited Edition Beers and certain specialty variety packs are produced in limited quantities and are sold at higher prices than the Company’s other products.distribution. The Company also releases a variety of specialty package and draft beers brewed in limited quantities for festivals and Beer Week celebrations.

Since 2012,celebrations and at its Samuel Adams Downtown Boston Tap Room, Samuel Adams Boston Brewery Tap Room and Samuel Adams Cincinnati Brewery Tap Room.

The Company offers eleven styles of flavored malt beverages in the Twisted Tea brand family, most of which are available nationally in both the United States and Canada. The majority of the promotional and distribution efforts for the Twisted Tea brand family are focused on Twisted Tea Original and Twisted Tea Half and Half in various can packages.
The Company offers seventeen styles of hard seltzer in the Truly brand family most of which are available nationally in the United States. The majority of the promotional and distribution efforts for the Truly brand family are focused on sleek can variety packages which include Truly Berry Mix Pack, Truly Citrus Mix Pack, Truly Tropical Mix Pack and Truly Lemonade Seltzer Mix Pack.
The Company offers twenty-five styles of hard cider in the Angry Orchard brand family most of which are available nationally in the United States. The majority of the promotional and distribution efforts for the Angry Orchard brand family are focused on Angry Orchard Crisp Apple, Angry Orchard Rosé and Angry Orchard Crisp Unfiltered in various bottle, can and keg packages.
The Company offers over 25 styles of beer in the Dogfish Head brand families have been available nationally. In 2015,family. The Company is in the Company beganprocess of increasing distribution from over 45 states to full national distribution in the United States. The Dogfish Head brand began in 1993 and it is recognized as an early leader in bringing culinary innovations to the U.S. craft beer market. The majority of certainthe promotional and distribution efforts for the Dogfish Head brand family are focused on continually-hopped Dogfish Head 60 Minute and 90 Minute IPAs along with Dogfish Head SeaQuench, an innovative session sour, and Dogfish Head Slightly Mighty a low calorie IPA. These four styles are offered in various can, bottle and keg packages. The Company also offers over 15 styles of distilled spirits under the Dogfish Head brand in small quantities and to limited markets. The Traveler Beer Co. brand andCompany does not own the Coney Island brand, including Coney Island Hard Root Beer. In 2016, the Company began national distribution of certain stylesrights outside of the Truly Spiked & Sparkling brand. All of these nationally available brands are available in various packages, including cans. The Company will continue to lookUnited States and Canada for complementary opportunities to leverage its capabilities, provided that they do not distract from its primary focus on its Samuel Adams brand.

the Dogfish Head beer and distilled spirits brands.

The Company continually evaluates the performance of its various beersbeer, hard seltzer and hard cider stylesproducts and the rationalization of its product line as a whole. Periodically, the Company discontinues certain styles and packages. Certain styles or brands put on hiatus or discontinued in previous years may be produced for the Company’s variety packs or reintroduced.

The Company’s beers, hard ciders and hard seltzers are sold by the Company’s sales force to the same types of customers in similar size quantities, at similar price points and through substantially the same channels of distribution. These beverages are manufactured using similar production processes, have comparable alcohol content and generally fall within the same regulatory environment.

Product and Packaging Innovations

The Company has a proven track record of innovation and building new brands and is committed to maintaining its position as a leading innovator. To that end, the Company continually test brews differenttests new beers, hard seltzers and hard
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ciders and other alcohol beverages and occasionally sellsmay sell them under

various brand labels for evaluation of drinker interest.interest. The Company also promotes the annual LongShot® American Homebrew Contest® in which homebrewers and employees of the Company submit their homebrews for inclusion in the LongShot®six-pack in the following year. In 2016, the Company sold over sixty Samuel Adams beers commercially and brewed many more test brews. The Company’s Boston Brewery, spends most ofthe Milton Brewery and the Orchard, along with its other larger breweries and brewery tap rooms spend significant time ideating, testing and developing alcohol beverages for the Company’s potential future commercial development and evaluating ingredients and process improvements for existing beverages.

In the last two years, the Company introduced new styles, flavors and packages which include Angry Orchard Rosé, Truly Berry Variety Pack, Truly Tropical Variety Pack, Sam’76, Samuel Adams New England IPA, Angry Orchard Crisp Unfiltered and Dogfish Head Slightly Mighty, as well as new brands which include Wild Leaf Hard Tea, a craft hard tea, and Tura Alcoholic Kombucha, an alcoholic kombucha tea. Many of these new product innovations are within the top product introductions in their respective categories. The Company is currently in the early stages of the national launch of the Truly Lemonade Hard Seltzer Variety Pack, an innovative hard seltzer with a robust flavor, 100 calories and 1 gram of sugar.
In 2013, the Company completed a
two-year
research effort to develop a beer can to improve the experience of the beer drinker’s experience compareddrinker who chooses to the traditionaldrink from a can. The features of this custom Sam can were designed to enhance the drinking experience and include a wider lid with an opening slightly further from the edge of the lid, an extended lip and an hourglass ridge.ridge, all of which features are believed by the Company to enhance the craft beer drinker’s experience relative to a traditional beverage can. Currently, Samuel Adams Boston Lager, Samuel Adams Seasonal beers, Samuel Adams Sam ’76, Samuel Adams New England IPA, Samuel Adams Rebel IPA beers and some of the A&S Brewing beers are available in this uniquely-designed can.

In late 2011, the Company formed a subsidiary, A&S Brewing Collaborative LLC, d/b/a A&S Brewing, as a craft brew incubator headed by Alan Newman, founder of Magic Hat Brewing Company. A&S Brewing is headquartered in Burlington, Vermont. The mission of A&S Brewing is to find new opportunities in craft brewing, which may be geographical or stylistic and some may be with existing breweries or brewpubs. A&S Brewing has access to the brewing talents and broad resources of the Company, as it looks for opportunities around the country. A&S Brewing brands include The Traveler Beer Company, the Angel City Brewery, the Concrete Beach Brewery and the Coney Island Brewery. The A&S Brewing company-owned small breweries are located in Los Angeles, California (the “Angel City Brewery”), Miami, Florida (the “Concrete Beach Brewery”) and Brooklyn, New York (the “Coney Island Brewery”). In late 2016, Alan Newman left the Company, as planned under his five year employment agreement, and the Company will continue the A&S Brewing business and mission under the new leadership of Rob Kreszswick, who, prior to his promotion, had been leading A&S Brewing sales since 2014. In 2016, A&S Brewing annual net sales were approximately 4% of the Company’s total net sales.

Sales, Distribution and Marketing

Most

As dictated by the legal and regulatory environment, most all of the Company’s sales are made to a network of approximately 350over 400 wholesalers in the United States and to a network of foreign wholesalers, importers or other agencies (collectively referred to as “Distributors”). These Distributors, in turn, sell the products to retailers, such as pubs, restaurants, grocery stores, club stores, convenience stores, packageliquor stores, bars, restaurants, stadiums and other retail outlets, where the products are sold to drinkers, and in some limited circumstances to parties who act as
sub-distributors.
The Company sells its products predominantly in the United States, but also has markets in Canada, Europe, Israel, Australia, New Zealand, the Caribbean, the Pacific Rim, Mexico, and Central and South America.

With few exceptions, the Company’s products are not the primary brands in its Distributors’ portfolios. Thus, the Company, in addition to competing with other beers, hard cidersseltzers and hard seltzersciders for a share of the drinker’s business, competes with other brewers for a share of the Distributor’s attention, time and selling efforts. During 2016,2019, the Company’s largest customerDistributor accounted for approximately 7%2% of the Company’s netgross sales. The top three Distributors collectively accounted for approximately 12%6% of the Company’s netgross sales. In some states and countries, the terms of the Company’s contracts with its Distributors may be affected by laws that restrict the enforcement of some contract terms, especially those related to the Company’s right to terminate the relationship.

Most products are shipped within days of completion and there has not been any significantpackaging, resulting in limited product order backlog. The Company has historically received most of its orders from domestic Distributors in the first week of a month for products to be shipped the following month and the Distributor would then carry three to five weeks of packaged inventory (usually at ambient temperatures) and three to four weeks of draft inventory.

In an effort to reduce both the time and temperature the Company’s beers experience at Distributor warehouses before reaching the retail market, in late 2010 the Company introduced its Freshest Beer Program with domestic

Distributors in several markets. The goal of the Freshest Beer Program is to provide betteron-time service, forecasting, production planning andwork in cooperation with the Distributors whileto provide better

on-time
service, forecasting and production planning, substantially reducing Distributor inventory levels at the Distributor.levels. At the close of its 20162019 fiscal year, the Company had 159 Distributors representing approximately 73% of the Company’s domestic volume participating in the program, which constitutes approximately 77% of its volume.Program. The Company has successfully reduced the inventories of participating Distributors in the aggregate by approximately two weeks, resulting in fresher beer
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being delivered to retail. The Freshest Beer Program has resulted in lower shipments of approximately 270,000, 87,000, and 103,000 case equivalents in 2016, 2015 and 2014, respectively, as measured atsignificantly changed the end of the year by evaluating theyear-on-year inventory reduction from the inventory levels that might otherwise have been expected. In 2015 and 2016, the Company has been piloting a small group of distributors on a pure replenishment service model within our Freshest Beer Program, which if successful would further reduce Distributor inventories. The ordering process has changed significantly for participating Distributors that participate in the Freshest Beer Program and has resulted in a shorter period between order placement and shipment. There are various risks associatedshipment and a resulting reduction in open orders.
In 2018 and 2019, in response to anticipated supply chain constraints and demand forecasts driven by the Truly Hard Seltzer and Twisted Tea brands, the Company began working with certain Distributors on plans to increase Distributor inventories of these brands to ensure that drinker demand can be met during seasonal peaks during the Freshest Beer Program that are discussedsummer months. The Company believes distributor inventory as of December 28, 2019 averaged approximately 4 weeks on hand and was at an appropriate level, based on supply chain capacity constraints and inventory requirements to support the forecasted growth. The Company expects wholesaler inventory levels inRisk Factorsbelow.

terms of weeks on hand to remain between 3 and 5 weeks for most of 2020.

Boston Beer has a sales force of approximately 415430 people, which the Company believes is one of the largest in the domestic beer industry. The Company’s sales organization is designed to develop and strengthen relations at the Distributor, retailer and drinker levels by providing educational and promotional programs. The Company’s sales force has a high level of product knowledge and is trained in the details of the brewing and selling processes. Sales representatives typically carry samples of the Company’s beers, hard cidersseltzers and hard seltzers,ciders, certain ingredients, such as hops and barley, and other promotional materials to educate wholesale and retail buyers about the quality and taste of the Company’s products. The Company has developed strong relationships with its Distributors and retailers, many of which have benefited from the Company’s premium pricing strategy and growth.

The Company also engages in media campaigns — including television, radio, digital and social media, billboards and print. These media efforts are complemented by participation in sponsorships, of cultural and community events,which currently include the National Hockey League, the Boston Red Sox, the Kentucky Derby, the Boston Marathon, local beer festivals, industry-related trade shows and promotional events at local establishments, to the extent permitted under local laws and regulations. The Company uses a wide array of
point-of-sale
items (banners, neons,neon signs, umbrellas, glassware, display pieces, signs and menu stands) designed to stimulate impulse sales and continued awareness.

In 2008, the Company launched its

Corporate Social Responsibility
The Company’s core philanthropic initiative is Samuel Adams Brewing the American Dream
®
. In partnership with ACCION, one of the nation’s largest
non-profit micro-lender,
micro-lenders, the program supports small business owners in the food, beverage, and brewing industries through access to business capital, coaching, and new market opportunities. The goal is to help strengthen small businesses, create local jobs and build vibrant communities. Since the inception of the Samuel Adams Brewing the American Dream program Samuel Adamsin 2008, the Company and ACCION have worked together to loan more than $14.5$36 million to nearly 1,200more than 2,300 small business owners who have subsequently repaid these loans at a rate of more than 97%96%. Samuel AdamsThe loan repayments received are reinvested into the program. Boston Beer employees, together with local business partners and community organizations, have provided coaching and mentoring to more than 7,00011,000 business owners across the country. These efforts have helped to create or maintain more than 4,7008,750 local jobs.

Ingredients and Packaging

The Company has been successful to date in obtaining sufficient quantities of the ingredients used in the production of its beverages. These ingredients include:

Malt
.
The
two-row
varieties of barley used in the Company’s malt are mainly grown in the United States and Canada. The 2015 North American barley crop, which supported most 2016 malt needs, was below historical long term averages with regards to both quality and quantity, driven by acreage declines and adverse weather events in key barley growing areas. The 20162019 North American barley crop, which will support 20172020 malt needs, was generally consistent with historical long termlong-term averages with regardsregard to both quality and quantity, though quality from key areas in Canada was again highly variable and in some cases below long term averages. The average

booked 2015 and 20162019 barley

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crop prices were comparable to historical long termlong-term averages. There has been a long-term trend of declining acres and production in North America against relatively stable malt demand. The Company purchased most of the malt used in the production of its beerbeers from two suppliers during 2016.2019. The Company currently has a multi-year contract with one of its suppliers and a one year
one-year
agreement with the other supplier. The Company also believes that there are other malt suppliers available that are capable of supplying its needs.

Hops
. The Company uses Noble hop varieties from Europe for many of its Samuel Adams beers and also uses hops grown in the other areas of Europe, and in the United States, England and New Zealand. Noble hops are grown in several specific areas recognized for growing hops with superior taste and aroma properties. These noble hops include Hallertau-Hallertauer, Tettnang-Tettnanger Hersbrucker and Spalt-Spalter from Germany and Saaz from the Czech Republic. The United States hops, grown primarily in the Pacific Northwest, namely Cascade, Palisade
®
, Simcoe
®
, Centennial, Chinook, Citra
®
, Amarillo
®
, Warrior and Mosaic
®
are used in certain Company ales and lagers, as are the Southern Hemisphere hop varieties, Galaxy and Nelson Sauvin. Traditional English hops, namely, East Kent Goldings and Fuggles, are also used in certain Company ales. Other hop sources and varieties including new experimental varieties, such as HBC 566 Lotus
™
and HBC 682Bru1
™
, are also tested from time to time and used in certain beers.

The Company uses hops in various formats including

T-90
hop pellets,
T-45
hop pellets and CO2 Extract.
The European hop crop harvested in 20162019 was well aboveconsistent with historical long term averages with regards toin both quality and quantity due to favorable temperatures and precipitation.quantity. The United States hop crop harvested in 20162019 was consistent with historical long term averages with regards toin quality, with an increase in overall quantity driven by expansion of planted acres in recent years. However, the demand for certain hops grown in the United States has risen dramatically due to the success and proliferation of craft brewers and the popularity of beer styles that include hop varieties grown in the United States, with the result that prices continue to rise for both spot purchases and forward contract pricing and occasionally certain United States hops are in tight supply until the next crop or beyond.

The Company enters into purchase commitments with eightnine primary hop dealers, based on the Company’s projected future volumes and brewing needs. The dealers either have the hops that are committed or will contract with farmers to meet the Company’s needs. The contracts with the hop dealers are denominated in Euros for the German and Czech Republic hops, in Pounds Sterling for thesome English hops, US Dollars for United States hops and New Zealand Dollars for the New Zealand hops. The Company does not currently hedge its forward currency commitments.

The

For the hop crop harvested in 2019, the Company expects to realize full delivery on European, United States and New Zealand hop contracts on the hop crop harvested in 2016.contracts. The Company attempts to maintain a one to
two-year
supply of essential hop varieties
on-hand
in order to limit the risk of an unexpected reduction in supply.

supply and procures hops needed for new beers, based on its best estimate of likely short-term demand. The Company classifies hops inventory in excess of two years of forecasted usage in other long term assets.

The Company believes it has adequate inventory and commitments for all hop varieties. This belief is based on expected growthvolume and beer style mix, allboth of which could ultimately be significantly different from what is currently planned. Variations to plan could result in hops shortages for specific beers or an excess of certain hops varieties.

The Company stores its hops in multiple cold storage warehouses to minimize the impact of a catastrophe at a single site.

Yeast
.
The Company uses multiple yeast strains for production of its beers, hard cidersseltzers and hard seltzers.ciders. While some strains are commercially available, other strains are proprietary. Since the proprietary strains cannot be replaced if destroyed, the Company protects these strains by storing multiple cultures of the same strain at different production locations and in several independent laboratories.

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Apples.
The Company uses special varieties and origins of apples in its hard ciders that it believes are important for their flavor profile.profiles. In 2016,2019, these apples were sourced primarily from European,Europe and the United States and New

Zealand suppliers and include bittersweet apples from France and New Zealand and culinary apples from Italy, Washington State and Washington State.New York. Purchases and commitments are denominated in Euros for European apples and US Dollars for United States apples and New Zealand Dollars for the New Zealand apples. There is limited availability of some of these apple varieties, and many outside factors, including weather conditions, growers rotating from apples to other crops, competitor demand, government regulation and legislation affecting agriculture, could affect both price and supply. The 20162019 apple cropscrop in Europe for certain regions was lower than historical long-term averages, due to climate conditions. The 2019 apple crop in the United States and New Zealand werewas consistent with historical long termlong-term averages. The Company has entered into contracts to cover its expected needs for 20172020 and expects to realize full delivery against these contracts.

The Company purchased and opened its cidery at the Orchard in 2015. The Company expects to useuses the apple varieties harvested at the Company-owned Orchard in Walden, NY to experiment and develop new hard ciders and for resale to customers. The Company may also use the apples harvested at the Orchard in small quantities in the Company’s current hard ciders, but, given the current volume and varieties of apples grown at the Orchard, such use is likely to be insignificant.

retail sales on site.

Other Ingredients
. The Company maintains competitive sources for most of the other ingredients used in the production of its beverages.

Packaging Materials
. The Company maintains competitive sources for the supply of certain packaging materials, such as cans, glass and shipping cases and glass.cases. The Company enters into limited-term supply agreements with certain vendors in order to receive preferential pricing. In 2016, cans,2019, crowns six pack carriers and labels were each supplied by a single source; however, the Company believes that alternative suppliers are available.

Truly Hard Seltzer beverages are primarily packaged in sleek cans. During 2018 and 2019, as the Truly brand family grew significantly and the Company experienced supply pressures on sleek cans. The demand for sleek cans in the beverage industry has significantly increased and there has been a shortage of capacity, as sleek can manufacturers attempt to adjust their supply chains to keep up with the increased demand.
The Company initiates bottle deposits in some states and reuses glass bottles that are returned pursuant to certain state bottle recycling laws. The Company derives some economic benefit from its reuse of returned glass bottles. The cost associated withfinancial impact of reusing the glass varies based on the costs of collection, sorting and handling, includingand arrangements with retailers, Distributors and dealers in recycled products. There is no guarantee that the current economics relating to the use of returned glass will continue or that the Company will continue to reuse returnable bottles.

Quality Assurance

As of December 31, 2016,28, 2019, the Company employed over fifteen brew masterssixteen brewmasters to monitor the Company’s brewing operations and control the production of its beers, hard cidersseltzers and hard seltzers.ciders both at Company-owned breweries and at the third-party breweries at which the Company’s products are brewed. Extensive tests, tastings and evaluations are typically required to ensure that each batch of the Company’s beers, hard ciders and hard seltzers conforms to the Company’s standards. The Company has
on-site
quality control labs at each of its Samuel Adamsthe Company-owned breweries and supports the smaller tap rooms and local breweries with additional centralized lab services.

With the exception of the Dogfish Head brand and certain specialty products, the Company includes a clearly legible “freshness” code on every bottle, can and keg of its beers, hard seltzer and hard ciders, in order to ensure that its customersdrinkers enjoy only the freshest products. Boston Beer was the first American brewer to use this practice.

Beer, Hard Cider and Hard Seltzer The Dogfish Head brand will adopt this practice for most of its beers during 2020.

Production Strategy

During 2016,2019, the Company brewed, fermented and packaged over 95%approximately 74% of its volume at breweries owned by the Company. The Company made capital investments in 20162019 of approximately $49.9 million.$94 million, most of
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which represented investments in the Company’s breweries. These investments were made mostly in the Company’s breweries to drive efficiencies and cost reductions and support product innovation and future growth. TheBased on its current estimates of future volumes and mix, the Company expects to invest between $40$135 million and $60$155 million in 2017, which is2020 to meet those estimates. Because actual capital investments are highly dependent on future volume and mix estimates andmeeting demand, the capital investments to meet those volume estimates. The actual amount spent may well be significantly different from these estimates.

The Company also engages in various product development activities. Such activities include researching market needs and competitive products, and sample brewing and market taste testing.

the Company’s current expectations.

The Pennsylvania Brewery, the Cincinnati Brewery and the CincinnatiMilton Brewery produce most of the Company’s shipment volume. The Pennsylvania Brewery is the Company’s largest brewery and the Cincinnati Brewery is the primary brewery for the production of most of the Company’s specialty, and lower volume packaged bottle products. The Milton Brewery currently produces only Dogfish Head brand beers and distilled spirits.
Production and retail activities at the eight local breweries and tap rooms, which include the Samuel Adams Downtown Boston Brewery’s productionTap Room, Samuel Adams Boston Brewery Tap Room, Samuel Adams Cincinnati Brewery Tap Room, Dogfish Head Brewing and Eats, Dogfish Head Milton Brewery Tasting Room and the three A&S Brewing breweries is mainly for developing new types of innovative and traditional beers and brewing and packaging beers for retail sales on site at tap rooms and gift shops, restaurant activities, developing innovative and traditional beers and in some cases supporting draft and package accounts in the respective local market area.

areas.

The Company’s Angry Orchard Innovation Cider House located at the Orchard in Walden, New York, opened in November 2015 and itsCidery’s production is mainly for developing new types of innovative hard ciders and fermenting and packaging ciders for retail sales on site at the cidery and gift shop and supporting draft and package accounts in the local market area.

The A&S Brewing breweries include the Angel City Brewery, Concrete Beach Brewery and Coney Island Brewery. The production at the A&S Brewing breweries is mainly for developing innovative and traditional beers and supporting draft accounts in the respective local market areas and providing foron-premise consumption of its beers at its beer halls.

The Company currently has a brewing services agreement with subsidiaries of City Brewing Company, LLC, to produce its products at facilities in Latrobe, Pennsylvania and Memphis, Tennessee.

The Company carefully selects breweries and packaging facilities owned by others withwith: (i) the capability of utilizing traditional brewing, fermenting and finishing methods andmethods; (ii) first-rate quality control capabilities throughout the process.process: and (iii) sleek can packaging and automated variety packaging capability and capacity. Under its brewing and packaging arrangements with third parties, the Company is charged a service fee based on units produced at each of the facilities and bears the costs of raw materials, risk, excise taxes and deposits for pallets and kegs and specialized equipment required to produce and package the Company’s beverages.

The Company currently has a brewing services agreement with subsidiaries of City Brewing Company, LLC (“City Brewing”). During 2018 and 2019, the Company amended the brewing services agreement to include a minimum capacity availability commitment by City Brewing. The amendment grants the Company the right to extend the agreement beyond the December 31, 2021 termination date on an annual basis through December 31, 2029. The amendments require the Company to pay up to $26.5 million dollars for capital improvements at City Brewing facilities of which $20.5 million has been paid as of December 28, 2019 and the remaining amount of $6.0 million is expected to be paid in May 2020. During 2019, City Brewing supplied approximately 23% of the Company’s annual shipment volume.

The Company’s International business is supplied by breweries owned by the Company, under brewing and packaging agreements that may include packaging bulk shipments of beer and hard cider, and production under license at international locations.
While the Company believes that it has alternatives available to it, in the event that production at any of its locations is interrupted, although severe interruptions at the Pennsylvania Brewery or City Brewing would be problematic, especially in seasonal peak periods. In addition, the Company may not be able to maintain its current economics, if interruptions were to occur, and could face significant delays in starting up replacement production locations. Potential interruptions at breweries include labor issues, governmental actions, quality issues, contractual disputes, machinery failures, operational shut downs,shutdowns, or natural or other unavoidable catastrophes. Also, as the brewing industry has consolidated and the Company has grown, the capacity and willingness of breweries owned by others where the Company could produce some of its beers, hard cidersseltzers and hard seltzers,ciders, if necessary, has become a more significant concern. The Company would work with itsavailable contract brewers to attempt to minimize any potential disruptions.

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Competition

The Better BeerHigh End category within the United States beer market is highly competitive due to large domestic and international brewers and the increasing number of craft brewers imported beers within this category who distribute similar products that have similar pricing and target drinkers, and efforts by large domestic brewers to enter this category.drinkers. The Company anticipatesexpects competition and innovation among domestic craft brewers to remain strong, as the number of craft brewers experienced their twelfth successive year of growth in 2016 and there were many new startups.continues to grow. The Company estimates there are over 6,500 craft8,000 breweries in operation, or in the planning stages, up from approximately 1,4091,500 operating craft breweries in 2006.2009. Most of these new breweries are craft (small and independent) brewers. Also, establishedexisting craft breweries are building more capacity, adding additional local tap rooms, expanding geographically and adding more SKUs and styles, as Distributors and retailers are promoting and making more shelf space available for more craft beer brands.

styles.

Imported beers, such as Corona
®
, Heineken
® and
, Modelo Especial
®
and Stella Artois
®
, continue to compete aggressively in the United States and have gained market share over the last ten years. Heineken and Constellation Brands (owner of the United States Distribution rights to Corona and Modelo Especial) may have substantially greater financial resources, marketing strength and distribution networks than the Company has.Company. The two largest brewers in the

United States, MillerCoorsAB InBev and AB InBev,Molson Coors, participate actively in the Better BeerHigh End category, both through importing and distributing foreign brands that compete in the Better BeerHigh End category and also with their own domestic specialty beers, either by developing new brands or by acquiring, in whole or part, existing craft breweries. In addition, Miller Coors’ Tenth and Blake and AB InBev’s High End Division and Molson Coors’ Tenth and Blake were formed as business units headquartered in the United States that are focused exclusively on competing in the Better Beer market.

During the last few years, there were numerous acquisitions in the beer industry with the largest being AB InBev’s $107 billion purchase of SAB Miller and the related sale by SAB Miller to MolsonCoors of its 58% share of the MillerCoors joint venture with MolsonCoors. High End category.

There were alsohave been numerous announcements of acquisitions of or investments in craft brewers by larger breweries and private equity and other investors. Most recently a unit of global brewer Kirin Holdings Co. announced the acquisition of New Belgium Brewing, the fourth largest craft brewer, for a reported amount of $350 to $400 million. Earlier in 2019, global brewer Mahou San Miguel increased its ownership of Founders Brewing Co. from 30% to 90% for a reported valuation of approximately $300 million. The most significant acquisitions in the last few years include Heineken’s acquisition of a 50% interest in Lagunitas Brewing Company for approximately $500 million,$1 billion, Constellation Brands’ acquisition of Ballast Point Brewing & Spirits for approximately $1 billion, AB InBev’s purchase of multiple craft breweries, including Elysian Brewing Company, Golden Road Brewing, Four Peaks Brewing Company, Breckenridge Brewing, Devils Backbone, Karbach, Wicked Weed, Platform Beer and KarbachCraft Brew Alliance, and MillerCoors’Molson Coors’ purchase of multiple craft breweries, including Hop Valley Brewing, Saint Archer Brewery and Revolver Brewing. Pabst Brewing Company acquired an ownership interest in and entered into an exclusive agreement to distribute nationally Small Town Brewery’s brands, including Not Your Fathers Hard Root Beer®, and entered into an agreement to distribute various United States cider brands of C&C Group PLC, including ‘Woodchuck’, ‘Magners’ and ‘Hornsby’s.’ AB InBev also acquired Spiked Seltzer, a previously independent hard seltzer company.

The Company’s products also compete with other alcoholic beverages for drinker attention and consumption and the pace of innovation in the categories in which the Company competes is increasing. In recent years, wine and spirits have been competing more directly with beers. The Company monitors such activity and attempts to develop strategies which benefit from the drinker’s interest in trading up, in order to position its beers, hard seltzers and hard ciders competitively with wine and spirits.

The Company competes with other beer and alcoholic beverage companies within a three-tier distribution system. The Company competes for a share of the Distributor’s attention, time and selling efforts. In retail establishments, the Company competes for shelf, cold box and tap space. From a drinker perspective, competition exists for brand acceptance and loyalty. The principal factors of competition in the Better Beer segment of themarket for High End beer industryoccasions include product quality and taste, brand advertising and imagery, trade and drinker promotions, pricing, packaging and the development of innovative new products.

The Company distributes its products through independent Distributors who also distribute competitors’ products. Certain brewers have contracts with their Distributors that impose requirements on the Distributors that are intended to maximize the Distributors’ attention, time and selling efforts on that brewer’s products. These contracts generally result in increased competition among brewers as the contracts may affect the manner in which a Distributor allocates selling effort and investment to the brands included in its portfolio. The Company closely monitors these and other trends in its Distributor network and works to develop programs and tactics intended to best position its products in the market.

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The Company has certain competitive advantages over the local and regional craft brewers, including a long history of awards for product quality, greater available resources and the ability to distribute and promote its products on a more cost-effective basis. Additionally, the Company believes it has competitive advantages over imported beers, including lower transportation costs, higher product quality, a lack of import charges and superior product freshness.

The Company’s Twisted Tea product line competes primarily within the FMB category of the beer industry. FMBs, such as Twisted Tea, Smirnoff Ice®, Mike’s Hard Lemonade
®
, Smirnoff Ice
®
, Bud Light Lime
®
Ritas, and Redds Redd’s
®
Apple Ale, Seagrams Escapes
®
, Arnold Palmer Spiked are flavored malt beverages that are typically priced competitively with Better Beers. ThisHigh End beers. As noted earlier, this category is highly competitive due to, among other factors, the presence of large brewers and spirits companies in the

category, the advertising of malt-based spirits brands in channels not available to the parent brands and a fast pace of product innovation.

The Company’s Truly Hard Seltzer beverages compete within the hard seltzer category. This category has been growing quickly since 2016, is highly competitive and includes large international and domestic competitors. Hard seltzers are typically priced competitively with High End beers and may compete for drinkers with beer, wine, spirits, or FMBs. Some of these competitors include Mark Anthony Brands under the brand name “White Claw”; ABInBev under “Bon & Viv’s” and “Natural Light Seltzer”; Diageo under “Smirnoff Spiked Sparkling Seltzer”; and MolsonCoors under “Henry’s Hard Sparkling Water”. The Company expects numerous additional entrants in the hard seltzer category during 2020, as the category continues to develop distribution and drinker awareness. Most significantly, ABInbev introduced and launched nationally “Bud Light Hard Seltzer” in January 2020 and Constellation has announced that “Corona Hard Seltzer” will be introduced and launched nationally in Spring 2020. In addition, Molson Coors has announced that it will introduce “Vizzy Hard Seltzer” in March 2020.
The Company’s Angry Orchard product line competes within the hard cider category. ThisAs noted earlier, this category is small and highly competitive and includes large international and domestic competitors, as well as many small regional and local hard cider companies. Hard ciders are typically priced competitively with BetterHigh End Beers and may compete for drinkers with beer, wine, spirits, or FMBs. Some of these competitors include C&C Group PLC under the brand names ‘Woodchuck’, ‘Magners’ and ‘Hornsby’s’; Heineken under the brand names ‘Strongbow’; AB InBev under ‘Michelob Ultra Cider’ and ‘Stella Cidre’ and ‘Virtue Cider’ and MillerCoors under the brand names ‘Smith and Forge’& Forge Hard Cider’ and ‘Crispin Cider’.

The Company’s Coney Island Hard Sodas In recent years, regional and Truly Spiked & Sparkling beverages compete withinlocal cideries, including ‘Bold Rock’ and ‘Austin East Ciders’, have built businesses that have gained share locally at the hard soda and hard seltzer categories, respectively. These categories are small, in their early stagesexpense of development, highly competitive and include large international and domestic competitors. Hard sodas and hard seltzers are typically priced competitively with Better Beers and may compete for drinkers with beer, wine, spirits, or FMBs. Some of these competitors include Pabst under ‘Not Your Fathers’; ABInbev under ‘Best Damn’ and ‘Spiked Seltzer’; Miller Coors under ‘Henry Weinhard’; Mikes Hard Lemonade under ‘White Claw’ and Diageo under “Smirnoff”.

the national brands.

Regulation and Taxation

The alcoholic beverage industry is regulated by federal, state and local governments. These regulations govern the production, sale and distribution of alcoholic beverages, including permitting, licensing, marketing and advertising. To operate its production facilities, the Company must obtain and maintain numerous permits, licenses and approvals from various governmental agencies, including but not limited to, the Alcohol and Tobacco Tax and Trade Bureau (the “TTB”), the Food and Drug Administration, state alcohol regulatory agencies and state and federal environmental agencies.

Governmental entities may levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. TheBeginning in 2018, as a result of the “Tax Cuts and Jobs Act”, the Company’s federal excise tax rate on malt beveragesbeer and hard seltzer is $18$16 per barrel on all barrels below 6 million barrels produced annually. The top tier rate on hard cider (with alcohol by volume of 7%8.5% or less) is $0.226 per gallon, on hard cider (with
non-qualifying
fermentable fruits) is $1.07 per gallon, and on artificially carbonated wine (hard cider with high CO2 levels) is $3.30 per gallon. Prior to 2018, the federal excise tax on beer and hard seltzer was $18 per barrel, on hard cider (with alcohol by volume of 8.5% or less) was $0.226 per gallon, on hard cider (with
non-qualifying
fermentable fruits) was $1.07 per gallon, and on artificially carbonated
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wine (hard cider with high CO2 levels) was $3.30 per gallon. These lower rates for beer, hard seltzer and hard cider were extended in December 2019 and currently expire at the end of 2020. States levy excise taxes at varying rates based on the type of beverage and alcohol content. Failure by the Company to comply with applicable federal, state or local laws and regulations could result in higher taxes, penalties, fees and suspension or revocation of permits, licenses or approvals. While there can be no assurance that any such regulatory action would not have a material adverse effect upon the Company or its operating results, the Company is not aware of any infraction affecting any of its licenses or permits that would materially impact its ability to continue its current operations.

Trademarks

The Company has obtained trademark registrations with the United States Patent and Trademark Office for over 215450 trademarks, including Samuel Adams
®
, Sam Adams
®
, Samuel Adams Boston Lager
®, Samuel Adams Utopias®, Samuel Adams Rebel®
, Samuel Adams Brewing the American Dream
®
, Twisted Tea
®
, Truly Hard Seltzer
®
, Angry Orchard
®
, Twisted TeaDogfish Head
®, The Traveler Beer Co.®
, Coney Island
®
, Angel City Brewery
®
, Concrete Beach
®
, Wild Leaf
®
, and Concrete BeachTura
®.
.. It also has a number of common law marks, including Infinium™ and Truly Spiked & Sparkling™. The Samuel Adams trademark, the Samuel Adams Boston Lager trademark, the Angry Orchard trademark, the Twisted Tea trademark and othertrademarks. Several Company trademarks are also registered or have registrations pending in various foreign countries. The Company regards its Samuel Adams family of trademarks and other trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any trademark infringements that could materially affect its current business or any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company’s policy is to pursue registration of its marks whenever appropriate and to oppose infringements of its marks through available enforcement actions.

options.

Environmental, Health and Safety Regulations and Operating Considerations

The Company’s operations are subject to a variety of extensive and changing federal, state and local environmental and occupational health and safety laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Environmental laws, regulations or ordinances may impose liability for the cost of remediation of, and for certain damages resulting from, sites of past releases of hazardous materials. The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that any costs arising from existing environmental laws will not have a material adverse effect on the Company’s financial condition or results of operations.

As part of its efforts to be environmentally friendly, the Company has reusedadopted a number of practices designed to improve recycling and reduce waste, and utilities consumption at its breweries. The Company also continues to reuse its glass bottles returned from certain states that have bottle deposit bills. The Company believes that it benefits economically from washing and reusing these bottles, which result in a lower cost than purchasing new glass, and that it benefits the environment by the reduction in landfill usage, the reduction of usage of raw materials and the lower utility costs for reusing bottles versus producing new bottles. The economics of using recycled glass varies based on the cost of collection, sorting and handling, and may be affected by local regulation, and retailer, Distributor, and glass dealer behavior. There is no guarantee that the current economics of using returned glass will continue, or that the Company will continue its current used glass practices.

The Company has adopted various policies and procedures intended to ensure that its facilities meet occupational health and safety requirements. The Company believes that it currently is in compliance with applicable requirements and will continue to endeavor to remain in compliance. There can be no assurances, however, that new and more restrictive requirements might not be adopted, compliance with which might have a material, adverse financial effect on the Company and its operating results, or that such policies and procedures will be consistently followed and be sufficient to prevent serious accidents.

Employees

As of December 31, 2016,28, 2019, the Company employed 1,5052,128 people, of which 9981 were covered by collective bargaining agreements at the Cincinnati Brewery. The collective bargaining agreements involve three labor
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unions, with two contractsone contract that covers 66 employees expiring in 20172025, one contract expiring in 2020, and one contract expiring in 2020. 91 employees were covered under collective bargaining agreements set to expire within one year of December 31, 2016.2022. The Company believes it maintains a good working relationship with all three labor unions and has no reason to believe that the good working relationship will not continue. The Company has experienced no work stoppages or threatened work stoppages, and believes that its employee relations are good.

Other

The Company submitted the Section 12(a) CEO Certification to the New York Stock Exchange in accordance with the requirements of Section 303A of the NYSE Listed Company Manual. This Annual Report on Form
10-K
contains at Exhibits 31.1 and 31.2 the certifications of the Chief Executive Officer and Chief Financial Officer, respectively, in accordance with the requirements of Section 302 of the Sarbanes-Oxley Act of 2002. The Company makes available free of charge copies of its Annual Report on Form
10-K,
as well as other reports required to be filed by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, on the Company’s investor relations website at
www.bostonbeer.com
, or upon written request to Investor Relations, The Boston Beer Company, Inc., One Design Center Place, Suite 850, Boston, Massachusetts 02210.

Item 1A.Risk Factors

In addition to the other information in this Annual Report on Form
10-K,
the risks described below should be carefully considered before deciding to invest in shares of the Company’s Class Class��A Common Stock. These are

risks and uncertainties that management believes are most likely to be material and therefore are most important for an investor to consider. The Company’s business operations and results may also be adversely affected by additional risks and uncertainties not presently known to it, or which it currently deems immaterial, or which are similar to those faced by other companies in its industry or business in general. If any of the following risks or uncertainties actually occurs, the Company’s business, financial condition, results of operations or cash flows would likely suffer. In that event, the market price of the Company’s Class A Common Stock could decline.

The Company Faces Substantial Competition.

The Better Beer categorymarket for High End beer occasions within the United States beer market is highly competitive, due to the increasing number of craft brewersdomestic and international beverage companies with similar pricing and target drinkers, and gains in market share achieved by domestic specialty beers and imported beers, and more recently the acquisition of craft brewers by larger brewers and the fourintroduction and expansion of hard seltzers. Some of the largest marketof these competitors include AB InBev, MillerCoors,Molson Coors, Constellation, Heineken and Heineken. The Company faces strong competition from these brewersMark Anthony Brands as they acquire craft brewers or introduce new domestic specialty brands and hard seltzers to many markets and expand their efforts behind existing brands. Imported beers, such as Corona
®
, Heineken
® and
, Modelo Especial
®
and Stella Artois
®
, also continue to compete aggressively in the United States beer market. The Company anticipates competition among domestic craft brewers will remain strong, as many local craft brewers experienced their twelfth successive year ofcontinue to experience growth in 2016 and there were many new startups.startups in 2019. The Company estimates there are now over 6,500 craft8,000 breweries in operation or in the planning stages up from 1,409 operating craftapproximately 1,500 breweries in 2006.2009. Also, existing craft breweries are building more capacity, adding additional local tap rooms, expanding geographically and adding more SKUs and styles as Distributors and retailers are promoting and making more shelf space available for more craft beer brands.styles. The continued growth in the sales of craft-brewed domestic beers, and in imported beers and hard seltzers is expected to increase the competition in the Better Beer categorymarket for High End beer occasions within the United States beer market and, as a result, prices and market share of the Company’s products may fluctuate and possibly decline.

The Company’s products compete generally with other alcoholic beverages. The Company competes with other beer and beverage companies not only for drinker acceptance and loyalty, but also for shelf, cold box and tap space in retail establishments and for marketing focus by the Company’s Distributors and their customers, all of which also distribute and sell other beers and alcoholic beverage products. Many of the Company’s competitors, including AB InBev, MillerCoors,Molson Coors, Heineken and Constellation Brands, have substantially greater financial resources, marketing strength and distribution networks than the Company. Moreover, the introduction of new products by competitors that compete directly with the Company’s products or that diminish the importance of
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the Company’s products to retailers or Distributors may have a material adverse effect on the Company’s business and financial results.

Further, the beer industry has seen continued consolidation among brewers in order to take advantage of cost savings opportunities for supplies, distribution and operations. Illustrative of this consolidation is AB InBev’s $107 billion purchase of SAB Miller and the related sale by SAB Miller to MolsonCoorsMolson Coors of its 58% share of the MillerCoors joint venture with MolsonCoors,Molson Coors, as well as Heineken’s acquisition of a 50% interest in Lagunitas Brewing Company for approximately $500 million and Constellation Brand’s acquisition of Ballast Point Brewing & Spirits for approximately $1 billion. Also, in the last few years, both AB InbevInBev and MillerCoorsMolson Coors have purchased multiple regional craft breweries with the intention to expand the capacity and distribution of these breweries. Due to the increased leverage that these combined operations will have in distribution and sales and marketing expenses, the costs to the Company of competing could increase. . The potential also exists for these large competitors to increase their influence with their Distributors, making it difficult for smaller brewers to maintain their market presence or enter new markets. The continuing consolidation could also reduce the contract brewing capacity that is available to the Company. These potential increases in the number and availability of competing brands, the costs to compete, reductions in contract brewing capacity and decreases in distribution support and opportunities may have a material adverse effect on the Company’s business and financial results.

There Is No Assurance of Continued Growth and that the Company Can Reverse its recent Sales declines and Return to Periods of Growth or, Conversely, Adapt to the Challenges of a Lower-Growththe Changing Competitive Environment.

In recent periods,

From 2015 to 2017, the Company has experienced a decline in the demand for its products.products, as craft beer growth rates slowed and the hard cider category declined. In 2018 and 2019, the Company experienced increases in demand for its products, driven by growth in its Truly and Twisted Tea brands, and grew 13% and 22% respectively in depletion volume compared to prior years. The Company is targeting shipment and depletion volume growth of between 15% and 25% in 2020. The Company’s ability to reverse thesesustain double digit growth trends and return to periods of growth may be limited,affected by its ability to increase its market share in domestic and international markets, including those markets that may be dominated by one or more regional or local craft brewers, and by thean increasing number of competitors the emergence of local tap rooms as a significant on premise channel, and markets where drinker interest is primarily in new or local products, rather than establishednational brands. The development of new products by the Company to meet these challenges may lead to reduced sales of the Company’s other products, including its flagship Samuel Adams Boston Lager.existing brands and there is no guarantee that these new product initiatives will generate stable long term volume. Additionally, changes in the use of media and technology are changing the economics of how to market brands to drinkers and may be diminishing the traditional competitive advantage the Company may have had in buying national media relative to smaller brands. While the Company believes that a combination of innovation, new brand messaging and exploration of new media, and increased investment and sales execution can lead to increased demand, there is no guarantee that the Company’s actions will be successful in maintaining the Company’s historical levels of profitability. Reduced sales, among other factors, could lead to lower brewery utilization, lower funds available to invest in brand support and reduced profitability, and these challenges may require a different mix and level of marketing investments to stabilize and grow volumes. A lower growth environment or periods of sales declines will present challenges for the Company to motivate and retain employees, and to maintain the current levels of distributor and retailer support of its brands, it’s current brand investment levels, and current returns to shareholders, and could potentially require a review of long term organization and brewery needs. Currently, the Company believes it can continue to grow in 2020 and in future years but there is no guarantee it will be successful.
The Company’s Advertising and Promotional Investments May Affect the Company’s Financial Results but Not be Effective.
The Company has incurred, and expects to continue to incur, significant advertising and promotional expenditures to enhance its brands. These expenditures may adversely affect the Company’s results of operations in a particular quarter or even for the full year, and may not result in increased sales. Variations in the levels of advertising and promotional expenditures have in the past caused, and are expected in the future to continue to cause, variability in the Company’s quarterly results of operations. While the Company believes that a combination of innovation, brand messagingattempts to invest only in effective advertising and investmentpromotional activities, it is difficult to correlate such investments with sales results, and sales execution can lead to increased demand, there is no guarantee that the Company’s actionsexpenditures will be successfuleffective in maintainingbuilding brand equity or growing long term sales.
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Changes in Public Attitudes and Drinker Tastes Could Harm the Company’s historical levels of profitability.

TurnoverBusiness. Regulatory Changes in Company Leadership or Other Key Positions May LeadResponse to Loss of Key Knowledge or Capability and Adversely Impact Company Performance.

In 2016 the Company made changes in several senior management positions, including hiring a new Chief Financial Officer, Chief Marketing Officer and senior supply chain officer to succeed retiring executives. In early 2017, the President and Chief Executive Officer, Martin Roper, announced his plans to retire in 2018 after leading the Company for more than 17 years. The Board of Directors has created a search committee and retained Korn Ferry to assist in identifying and evaluating the best candidates to succeed Roper as CEO. The Company may well experience further changes in key leadership or key positions in the future. The departure of key leadership personnel, especially a long-serving chief executive officer, can take from the Company significant knowledge and experience. This loss of knowledge and experience can be mitigated through successful hiring and transition, but there can be no assurance that the Company will be successful in such efforts. Attracting, retaining, integrating and developing high performance individuals in key roles is a core component of the Company’s strategy for addressing its business opportunities. Attracting and retaining qualified senior leadership may be more challenging under adverse business conditions, such as the declining growth environment now facing the Company. Failure to attract and retain the right talent, or to smoothly manage the transition of responsibilities resulting from such turnover, would affect the Company’s ability to meet its challenges and may cause the Company to miss performance objectives or financial targets.

The Company May Not Be Able to Manage Demand for Its Products.

The Company’s future growth may also be limited by its ability to meet production goals and/or targets at the Company’s owned breweries, disruption or operating performance issues at the Company’s owned breweries, limits on the availability of suitable production capacity at third party-owned breweries, and the Company’s ability to enter into brewing contracts with third party-owned breweries on commercially acceptable terms, and its ability to obtain sufficient quantities of certain ingredients and packaging materials, such as hops, malt, cider ingredients, bottles and cans, from suppliers.

The Company has Significantly Increased its Product Offerings and Distribution Footprint, which Increases Complexity andPublic Attitudes Could Adversely Affect the Company’s Results.

Business.

The alcoholic beverage industry has been the subject of considerable societal and political attention for several years, due to public concern over alcohol-related social problems, including driving under the influence, underage drinking and health consequences from the misuse of alcohol, including alcoholism. As an outgrowth of these concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed, that further restrictions on the sale of alcohol might be imposed or that there may be renewed efforts to impose increased excise or other taxes on beer sold in the United States.
The domestic beer industry, other than the market for High End beer occasions, has experienced a slight decline in shipments over the last ten years. The Company has significantlybelieves that this decline is due to declining alcohol consumption per person in the population, drinkers trading up to drink high quality, more flavorful beers, health and wellness trends and increased the number of its commercially available beers, FMBs, hard ciderscompetition from wine and hard seltzers that it produces. Since 2010, the Company has introduced many new beers, ciders and hard seltzers under the Samuel Adams, Angry Orchard, Twisted Tea and Truly Spiked & Sparkling brand names. A&S Brewing currently has four brands, including three small breweries and retail beer halls where beer is sold and consumedon-premise. In 2015, the Company began national distribution of certain styles of the Traveler Beer

brand and the Coney Island beer brand, including Coney Island Hard Root Beer. Also in November 2015, the Company opened the Angry Orchard Innovation Cider House at its apple orchard located in Walden, New York, where hard cider is fermented, sold and consumedon-premise. In 2016, the Company began national distribution of certain styles of the Truly Spiked & Sparkling brand. These additional brands and locations, along with the increases in demand for certain existing brands, have added to the complexityspirits companies. If consumption of the Company’s product development process, as well as its brewing, fermenting, packaging, marketing and selling processes. The Company does not haveproducts in general were to come into disfavor among domestic drinkers, or if the domestic beer industry were subjected to significant experience with managing this number of brands and products and has limited experience with integrating acquired brandsadditional societal pressure or operating small production facilities and retail operations. There can be no assurance that the Company will effectively manage such increased complexity, without experiencing operating inefficiencies or control deficiencies. Such inefficiencies or deficiencies could have a material adverse effect ongovernmental regulations, the Company’s business could be materially adversely affected.

Certain states are considering or have passed laws and financial results.

Unexpected Events at Company-Owned Production Facilities, Reduced Availabilityregulations that allow the sale and distribution of Breweries Owned by Others, Increased Complexitymarijuana. Currently it is not possible to predict the impact of this on sales of alcohol, but it is possible that legal marijuana usage could adversely impact the demand for the Company’s Business, or the Expansion Costs of the Company-Owned Breweries Could Have A Material Adverse Effect on the Company’s Operations or Financial Results.

Prior to 2008, the Company pursued a production strategy that combined the capacity at its Cincinnati Brewery, which was acquired in 1997, with significant production arrangements at breweries owned by third parties. The brewing services arrangements with breweries owned by others allowed the Company to utilize their excess capacity, providing the Company with production flexibility, as well as cost advantages over its competitors, while maintaining full control over the brewing process for its beers. The Company purchased the Pennsylvania Brewery in June 2008. As a result of that acquisition and the subsequent expansion of the Pennsylvania Brewery’s capacity, the volume of core brands brewed at Company-owned breweries increased, and currently over 95% of the Company’s volume is brewed and packaged at breweries that it owns.

In 2016, the Company brewed its flagship beer, Samuel Adams Boston Lager, at each of its three Samuel Adams breweries, but at any particular time it may rely on only one brewery for its products other than Samuel Adams Boston Lager. The Company expects to continue to brew most all of its volume in 2017 at its Company-owned breweries. This reliance on its own breweries exposes the Company to capacity constraints and risk of disruption of supply, as these breweries are operating at or close to current capacity in peak months. Management believes that it has alternatives available to it, in the event that production at any of its brewing locations is temporarily interrupted, although as volumes at the Pennsylvania Brewery increase, severe interruptions there would be problematic, particularly during peak season. In addition, if interruptions were to occur, the Company may not be able to maintain its current economics and could face significant delays in starting replacement brewing locations. Potential interruptions at breweries include labor issues, governmental action, quality issues, contractual disputes, machinery failures, operational shut downs or natural or unavoidable catastrophe.

The growth in the Company’s business and product complexity and the expansion of the capacities and manpower at the Company’s breweries to facilitate greater reliance on its owned breweries heighten the management challenges that the Company faces. In recent years, the Company has had product shortages and service issues and the Company’s supply chain struggled under the increased volume and experienced increased operational and freight costs as it reacted. In response to these issues, the Company has significantly increased its packaging capabilities and tank capacity and added personnel to address these challenges. There can be no assurance that the Company will effectively manage such increasing complexity without experiencing future planning failures, operating inefficiencies, insufficient employee training, control deficiencies or other issues that could have a material adverse effect on the Company’s business and financial results. The prior growth of the Company, changes in operating procedures and increased complexity have required significant capital investment. The Company to date has not seen operating cost leverage from these increased volumes and there is no guarantee that it will.

The Company continues to avail itself of capacity at third-party breweries. During 2016, the Company brewed and/or packaged certain products under service contracts at facilities located in Latrobe, Pennsylvania and

Memphis, Tennessee. In selecting third party breweries for brewing services arrangements, the Company carefully weighs a brewery’s capability of utilizing traditional brewing, fermenting and finishing methods and its quality control capabilities throughout the production process. To the extent that the Company needs to avail itself of a third-party brewing services arrangement, it exposes itself to higher than planned costs of operating under such contract arrangements than would apply at the Company-owned breweries or an unexpected decline in the brewing capacity available to it, either of which could have a material adverse effect on the Company’s business and financial results. The use of such third party facilities also creates higher logistical costs and uncertainty in the ability to deliver product to the Company’s customers efficiently and on time.

As the brewing industry continues to consolidate and the Company has grown, the capacity and willingness of breweries owned by others where the Company could brew some of its beers, if necessary, has become a more significant concern and, thus, there is no guarantee that the Company’s brewing needs will be uniformly met. The Company continues to work at its Company-owned breweries, and with its contract brewers to attempt to minimize any potential disruptions. Nevertheless, should an interruption occur, the Company could experience temporary shortfalls in production and/or increased production and/or distribution costs and be required to make significant capital investments to secure alternative capacity for certain brands and packages, the combination of which could have a material adverse effect on the Company’s business and financial results. A simultaneous interruption at several of the Company’s production locations or an unexpected interruption at one of the Company-owned breweries would likely cause significant disruption, increased costs and, potentially, lost sales.

products.

The Company Is Dependent on Its Distributors.

In the United States, where approximately 96% of its beer is sold, the Company sells most all of its alcohol beverages to independent beer Distributors for distribution to retailers and, ultimately, to drinkers. Although the Company currently has arrangements with approximately 350over 400 Distributors, sustained growth will require it to maintain such relationships and possibly enter into agreements with additional Distributors. Changes in control or ownership within the current distribution network could lead to less support of the Company’s products. No assurance can be given that the Company will be able to maintain its current distribution network or secure additional Distributors on terms favorable to the Company.

Contributing to distribution risk is the fact that the Company’s distribution agreements are generally terminable by the Distributor on relatively short notice. While these distribution agreements contain provisions giving the Company enforcement and termination rights, some state laws prohibit the Company from exercising these contractual rights. The Company’s ability to maintain its existing distribution arrangements may be adversely affected by the fact that many of its Distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore, they may be influenced by such producers. If the Company’s existing distribution agreements are terminated, it may not be able to enter into new distribution agreements on substantially similar terms, which may result in an increase in the costs of distribution.

No assurance can be given that the Company will be able to maintain its current distribution network or secure additional Distributors on terms not less favorable to the Company than its current arrangements.
The Company’s Freshest Beer ProgramRecent Acquisition of Dogfish Head Involves a Number of Risks, the Occurrence of Which Could Adversely Impact the Company’sAffect its Business, Financial Condition, and Operating Results.

In late 2010,

On July 3, 2019, the Company startedcompleted its acquisition of Dogfish Head Brewery and various related operations, through the implementationacquisition of its Freshest Beer Program with domestic Distributors to reduce bothall of the timeequity interests held by certain private entities in
Off-Centered
Way LLC, the parent holding company of the Dogfish Head Brewery operations. The Transaction involves certain risks, the occurrence of which could materially and temperatureadversely affect the Company’s beers experience at Distributor warehouses before reachingbusiness, liquidity, financial condition, and operating results, including:
diversion of management’s attention to integrate Dogfish Head’s operations;
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disruption to the market. Historically, Distributors have carried threeCompany’s existing operations and plans or inability to five weekseffectively manage its expanded operations;
failure, difficulties or delays in securing, integrating and assimilating information, financial systems, internal controls, operations, production processes and products, or the distribution channel for Dogfish Head’s businesses and product lines;
potential loss of packaged inventory (usually at ambient temperatures)key Dogfish Head employees, suppliers, distributors and threedrinkers or other adverse effects on existing business relationships with suppliers, distributors and drinkers;
potential inability to four weeksfully integrate Dogfish Head’s distributor into the Company’s existing wholesaler network
adverse impact on overall profitability, if the Company’s expanded operations do not achieve the growth prospects, net revenues, earnings, cost or revenue synergies, or other financial results projected in the Company’s valuation models, or delays in the realization thereof;
reallocation of draft inventory.amounts of capital from the Company’s other strategic initiatives;
inaccurate assessment of undisclosed, contingent or other liabilities of the acquired operations, unanticipated costs associated with the Transaction, and an inability to recover or manage such liabilities and costs; and
impacts as a result of purchase accounting adjustments, incorrect estimates made in the accounting for the Transaction or the potential future
write-off
of significant amounts of goodwill, intangible assets and/or other tangible assets if the Dogfish Head business does not perform in the future as expected, or other potential financial accounting or reporting impacts
The Company cannot assure that it will realize the expected benefits of the Transaction or that the acquired Dogfish Head operations will be profitable. The Company’s goal isfailure to reduce this warehouse time through betteron-time service, forecasting, production planning and cooperationadequately manage the risks associated with the Distributors. At December 31, 2016,Transaction could have a material adverse effect on its business, liquidity, financial condition or results of operations.
Impact of Changes in Drinker Attitudes on Brand Equity and Inherent Risk of Reliance on the Company’s Founders in the Samuel Adams and Dogfish Head Brand Communications.
In addition to the societal and political risks discussed above, there is also no guarantee that the brand equities that the Company had 159 Distributors, representing approximately 77%has built in its brands will continue to appeal to drinkers. Changes in drinker attitudes or demands, or competitor activity and promotion, could adversely affect the strength of the Company’s brands and the revenue that is generated from that strength. It is possible that the Company could react to such changes and reposition its volume, participatingbrands, but there is no certainty that the Company would be able to maintain volumes, pricing power and profitability. It is also possible that marketing messages or other actions taken by the Company could damage its brand equities, as opposed to building them. If such damage were to occur, it would likely have a negative effect on the financial condition of the Company.
In addition to these inherent brand risks, C. James Koch, the founder and Chairman of the Company, as well as the founders of Dogfish Head brand, Samuel Calagione, Founder and Brewer, Dogfish Head Brewery and Mariah Calagione, Founder and Communitarian, Dogfish Head Brewery are an integral part of the Samuel Adams and Dogfish Head brand histories, equity and current and potential future brand messaging and the Company relies on the positive public perception of these founders. The role of these founders as founders, brewers and leaders of the Company is emphasized as part of the Company’s brand communication and has appeal to some drinkers. If these founders were not available to the Company to continue their active roles, their absence could negatively affect the strength of the Company’s messaging and, accordingly, the Company’s growth prospects. The Company and its brands may also be impacted if drinkers’ views of these founders were to change negatively. If either of these were to occur, the Company might need to adapt its strategy for communicating its key messages
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regarding its traditional brewing processes, brewing heritage and quality. Any such change in the programCompany’s messaging strategy might have a detrimental impact on the future growth of the Company.
Turnover in Company Leadership or Other Key Positions May Lead to Loss of Key Knowledge or Capability and Adversely Impact Company Performance.
In early 2017, the Company’s then President and Chief Executive Officer, Martin Roper, announced his plans to retire in 2018 after leading the Company for more than 17 years. In the second quarter of 2018, Dave Burwick joined as President and Chief Executive Officer. Prior to commencing that role, Mr. Burwick had an established track record of innovation and business success in the beverage and consumer goods industries and had served on Boston Beer’s Board of Directors since 2005. His most recent role was Chief Executive Officer of Peet’s Coffee and prior to joining Peet’s, Mr. Burwick served as President of North America for Weight Watchers and in numerous leadership roles over 20 years at various stagesPepsiCo, including Chief Marketing Officer of inventory reduction. Pepsi-Cola North America. The Company may well experience further changes in key leadership or key positions in the future. The departure of key leadership personnel, especially a Chief Executive Officer, can take from the Company significant knowledge and experience. This loss of knowledge and experience can be mitigated through successful hiring and transition, but there can be no assurance that the Company will be successful in such efforts. Attracting, retaining, integrating and developing high performance individuals in key roles is a core component of the Company’s strategy for addressing its business opportunities. Attracting and retaining qualified senior leadership may be more challenging under adverse business conditions, such as the declining growth environment that faced the Company in prior years. Failure to attract and retain the right talent, or to manage the transition of responsibilities resulting from such turnover smoothly, would affect the Company’s ability to meet its challenges and may cause the Company to miss performance objectives or financial targets.
The Company has successfully reducedSignificantly Increased its Product Offerings and Distribution Footprint, which Increases Complexity and Could Adversely Affect the inventoriesCompany’s Results.
The Company has significantly increased the number of participating Distributors by approximately two weeks, resulting in fresher beer being delivered to retail. The Freshest Beer Program has resulted in lower shipments of approximately 270,000, 87,000,commercially available beers, hard seltzers and 103,000 case equivalents in 2016, 2015 and 2014 respectively as measured athard ciders that it produces. In the end of the year by evaluating

the year on year inventory reduction from the inventory levels that might otherwise have been expected. In 2015 and 2016,last five years, the Company has been pilotingintroduced many new beers, hard seltzers and hard ciders under the Samuel Adams, Twisted Tea, Truly Hard Seltzer, Angry Orchard and three A&S Brewing brands. In early 2019, the Company introduced new brands including Wild Leaf Hard Tea, a craft hard tea, and Tura Alcoholic Kombucha, an alcoholic kombucha tea. In July 2019, the addition of the Dogfish Head brand added over 25 styles of beer, 15 styles of distilled spirits, two brewery tap rooms, a restaurant and a boutique Inn. In January 2020, the Company opened the Samuel Adams Tap Room and small group of distributors onbrewery in downtown Boston. The Company currently operates 10 retail locations, including eight brewery tap rooms, a pure replenishment service model within our Freshest Beer Program, which if successful would further reduce Distributor inventories. The ordering process has changed significantlycidery tasting room and a restaurant, where its beers, hard seltzers, hard ciders and distilled spirits are sold and consumed

on-premise.
These additional brands and locations, along with the increases in demand for Distributors that participate in the Freshest Beer Program and has resulted in a shorter period between order placement and shipment and posed much greater challenges for forecasting and production planning. Also, changescertain existing brands, have added to the Distributor ordering process has increased the complexity of the Company’s revenue recognition for shipmentsproduct development process, as well as its brewing, fermenting, packaging, marketing and selling processes and retail operations. There can be no assurance that the Company will effectively manage such increased complexity, without experiencing coordination issues, and operating inefficiencies, supply shortages or control deficiencies. Such inefficiencies or deficiencies could have a material adverse effect on the Company’s business and financial results.
Impact of Reliance on Company-Owned Production Facilities, Reduced Availability of Breweries Owned by Others, and Inability to Distributors that participateLeverage Investment in the Freshest Beer Program.

ItCompany-Owned Breweries Could Have A Material Adverse Effect on the Company’s Operations or Financial Results.

During 2019, the Company brewed, fermented and packaged approximately 74% of its volume at breweries owned by the Company. The Company expects to continue to produce the majority of its domestic volume in 2020 at its Company-owned breweries. This reliance on its own breweries exposes the Company to capacity constraints and risk of disruption of supply, as these breweries are operating at or close to current capacity in peak months. Management believes that it has alternatives available to it, in the event that production at any of its
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brewing locations is possibletemporarily interrupted, although as volumes at the Pennsylvania Brewery increase, severe interruptions there would be problematic, particularly during peak seasons. In addition, if interruptions were to occur, the Company might not be able to maintain its current economics and could face significant delays in starting replacement brewing locations. Potential interruptions at breweries include labor issues, governmental action, quality issues, contractual disputes, machinery failures, operational shut downs or natural or unavoidable catastrophes.
The growth in the Company’s business and product complexity and the Company’s reliance on its owned breweries heighten the management challenges that the Freshest Beer Program mayCompany faces. In recent years, the Company has had product shortages and service issues. The Company’s supply chain struggled under the increased volume and experienced increased operational and freight costs as it reacted. In response to these issues, the Company has significantly increased its packaging capabilities and tank capacity and added personnel to address these challenges. There can be no assurance that the Company will effectively manage such increasing complexity without experiencing future planning failures, operating inefficiencies, insufficient employee training, control deficiencies or other issues that could have a material adverse effect on the Company’s business and financial results. The prior growth of the Company, changes in operating procedures and increased complexity have required significant capital investment. To date, the Company on an overall basis has not ultimately be successful;seen operating cost leverage from these investments and there is no guarantee that it will.
The Company continues to avail itself of capacity at third-party breweries. During 2019, approximately 23% of the Company’s annual shipment volume was brewed and/or packaged under service agreements with City Brewing Company, LLC. In selecting third party breweries for brewing services arrangements, the Company carefully weighs a brewery’s capability of utilizing traditional brewing, fermenting and finishing methods, its quality control capabilities throughout the production process and sleek can packaging and automated variety packaging capability and capacity. To the extent that the Company needs to avail itself of a third-party brewing services arrangement, it exposes itself to higher than planned costs of implementation may exceedoperating under such contract arrangements than would apply at the value realized; or thatCompany-owned breweries, potential lower service levels and reliability than internal production, and potential unexpected declines in the outcomebrewing capacity available to it, any of which could have a material adverse effect on the Company’s business and financial results. The use of such inventory reductions may prove detrimentalthird party facilities also creates higher logistical costs and uncertainty in the ability to deliver product to the Company’s business trendscustomers efficiently and abilityon time.
As the beer industry continues to execute at retail.consolidate and the Company has grown, the capacity and willingness of breweries owned by others where the Company could brew, ferment or package some of its products, if necessary, has become a more significant concern and, thus, there is no guarantee that the Company’s needs will be uniformly met. The Company may encounter unexpected problemscontinues to work at its Company-owned breweries and with forecasting, accounting,its contract brewers to attempt to minimize any potential disruptions. Nevertheless, should an interruption occur, the Company could experience temporary shortfalls in production and/or increased production and/or distribution costs and Distributor cooperation. These issues may inbe required to make significant capital investments to secure alternative capacity for certain brands and packages, the pastcombination of which could have leda material adverse effect on the Company’s business and in the future could lead to shortages and out of stocksfinancial results. A simultaneous interruption at several of the Company’s productsproduction locations or an unexpected interruption at one of the DistributorCompany-owned breweries would likely cause significant disruption, increased costs and, retailer levels,potentially, lost sales.
The Company’s emphasis on owning production facilities requires it to continue to make a significant level of capital expenditure to maintain and improve these facilities and to incur significant fixed operating costs to support them. In an uncertain volume environment, the Company faces the risk of not being able to support the owned brewery operating costs, if volumes were to decline. At the same time, despite making these expenditures and incurring these costs, if demand were to increase significantly, the Company could still face the risk of not being able to meet the increased demand internally.
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The Company attempts to mitigate production and distribution risks through a combination of owned breweries and access to contract facilities, but there is no guarantee that this strategy is optimal, and it might result in increasedshort term costs negatively impact Distributor relations, and/or delay the Company’s implementation of this program.

The Company also fills orders from those of its Distributors who may independently choose to build their inventories or run their inventories down. Such a change in Distributor inventories is unpredictable and can lead to fluctuations in the Company’s quarterly or annual results.

inefficiencies.

The Company is Dependent on Key Ingredient Suppliers, Including Foreign Sources; Its Dependence on Foreign Sources Creates Foreign Currency Exposure for the Company; The Company’s Use of Natural Ingredients Creates Weather and Crop Reliability and Excess/Shortage Inventory Exposure for the Company.

The Company purchases a substantial portion of the raw materials used in the brewing of its products, including its malt, hops barley and other ingredients, from a limited number of foreign and domestic suppliers. The Company purchased most of the malt used in the production of its beer from two suppliers during 2016.2019. Nevertheless, the Company believes that there are other malt vendors available that are capable of supplying part of its needs. The Company is exposed to the quality of the barley crop each year, and significant failure of a crop would adversely affect the Company’s costs.

The Company predominantly uses Noble hops for its Samuel Adams lagers. Noble hops are varieties from several specific growing areas recognized for superior taste and aroma properties and include Hallertau-Hallertauer, Tettnang-Tettnanger, Hersbruck-Hersbrucker and Spalt-Spalter from Germany and
Saaz-Saazer
from the Czech Republic. Noble hops are rare and more expensive than most other varieties of hops. Traditional English hops, namely, East Kent Goldings and English Fuggles, and/or United States hops are used in most of the Company’s ales. The demand for hops grown in the United States has grown due to the success and growth of craft brewers and the popularity of beer styles that include hops grown in the United States. Certain United States hops are in tight supply and prices have risen for both spot purchases and forward contract pricing, accordingly. The Company enters into purchase commitments with several hops dealers, based on the Company’s projected future volumes and brewing needs. The dealers then contract with farmers to meet the Company’s needs. However, the performance and availability of the hops, as with any agricultural product, may be materially adversely affected by factors such as adverse weather or pests and there is no guarantee the contracts will be fulfilled completely. Further, the use of fertilizers and pesticides that do not conform to United States regulations, the imposition of export/import restrictions (such as increased tariffs and duties) and changes in currency exchange rates could result in increased prices or shortages of acceptable hops.

The Company attempts to maintain up to a
two-year
supply of essential hop varieties
on-hand
in order to limit the risk of an unexpected reduction in supply.supply, but as the Company innovates, the availability of certain hop varieties for new products is likely significantly lower. The Company buys new hop varieties for its innovation based on its best estimate of demand and does not try to get to
two-year
supply on hand immediately. Given the imprecision of forecasting future volumes, the Company is at hop supply risk on certain varieties if its innovations are significantly more successful than expected. The Company stores its hops in multiple cold storage warehouses to minimize the impact of a catastrophe at a single site. Hops and malt are agricultural products and therefore many outside factors, including weather conditions, farmers rotating out of hops or barley to other crops, government regulations and legislation affecting agriculture, could affect both price and supply.

The Company’s accounting policy for hops inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed management’s expected future usage. The computation of the excess inventory requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs, among others. Actual results may differ materially from management’s estimates. The Company continues to manage inventory levels and purchase commitments in an effort to maximize utilization of hops on hand and hops under commitment. However, changes in management’s assumptions regarding future sales growth, product mix and hops market conditions could result in future material losses.
The Company uses special varieties of apples in its ciders that it believes are important for the ciders’ flavor profile. These apples are sourced primarily from European and United States and New Zealand suppliers and include bittersweet apples from France and New Zealand and culinary apples from Italy and Washington state. There is limited availability of these
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apples and many outside factors, including weather conditions, farmers rotating from apples to other crops, government regulations and legislation affecting agriculture, could affect both price and supply. In 2012, the Company experienced shortages of apples, primarily due to growth in excess of that planned, that impacted the timing of shipments of its hard ciders to Distributors. Since 2012, the Company has not experienced any shortage of apples. The Company has entered into contracts to cover its expected needs for 20172020 and expects to realize full delivery against these contracts.

Except for the shortage of apples in 2012, the

The Company has not experienced material difficulties in obtaining timely delivery from its suppliers, although the Company has had to pay significantly above historical prices to secure supplies when inventory and supply have been tight.
The Company’s new product development can also be constrained by any limited availability of certain ingredients. Growth rates higher than planned or the introduction of new products requiring special ingredients could create demand for ingredients greater than the Company can source. Although the Company believes that there are alternative sources available for some of the ingredients and packaging materials, there can be no assurance that the Company would be able to acquire such ingredients or packaging materials from substitute sources on a timely or cost effectivecost-effective basis, in the event that current suppliers could not adequately fulfill orders. The loss or significant reduction in the capability of a supplier to support the Company’s requirements could, in the short-term, adversely affect the Company’s business and financial results, until alternative supply arrangements were secured.

The Company’s contracts for certain hops and apples that are payable in Euros, Pounds Sterling and New Zealand dollars, and therefore, the Company is subject to the risk that the Euro, Pound or New Zealand dollar may fluctuate adversely against the U.S. dollar. The Company has, as a practice, not hedged this exposure, although this practice is regularly reviewed. Significant adverse fluctuations in foreign currency exchange rates may have a material adverse effect on the Company’s business and financial results. The cost of hops has increased in recent years due to the rising market price of hops and exchange rate changes. The continuation of these trends will impact the Company’s product cost and potentially the Company’s ability to meet the demand for its beers. The Company buys some other ingredients and capital equipment from foreign suppliers for which the Company also carries exposure to foreign exchange rate changes.

The Company’s accounting policy for hops inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed management’s expected future usage. The computation of the excess inventory requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. Actual results may differ materially from management’s estimates.

The Company continues to manage inventory levels and purchase commitments inis Dependent on Key Packaging Suppliers, an effort to maximize utilization of hops on hand and hops under commitment. However, changes in management’s assumptions regarding future sales growth, product mix and hops market conditions could result in future material losses.

An Increase in Packaging Costs Could Harm the Company’s Financial Results.

During 2018 and 2019, as the Truly brand family grew significantly and the Company experienced supply pressures on sleek cans. The demand for sleek cans in the beverage industry has significantly increased and there has been a shortage of capacity as sleek can manufacturers and sleek can contract manufacturers adjust their supply chains to accommodate this increased demand. The Company is working to increase packaging capacity to accommodate its expected needs for 2020 and currently expects to have sufficient supply and capacity to meet those needs.
The Company maintains competitive sources for the supply of certain packaging materials, such as sleek cans,
non-sleek
cans, glass and shipping cases and glass.cases. The Company enters into limited-term supply agreements with certain vendors in order to receive preferential pricing. In 2016, cans,2019, crowns six pack carriers and labels were each supplied by single sources. Although the Company believes that alternative suppliers are available, the loss of any of the Company’s packaging materials suppliers could, in the short-term, adversely affect the Company’s results of operations, cash flows and financial position until alternative supply arrangements were secured. Additionally, there has been acquisition and consolidation activity in several of the packaging supplier networks which could potentially lead to disruption in supply and changes in economics. If packaging costs continue to increase, there is no guarantee that such costs can be fully passed along to drinkers through increased prices. The Company has

entered into long-term supply agreements for certain packaging materials that have shielded it from some cost increases. These contracts have varying lengths and terms and there is no guarantee that the economics of these contracts can be replicated when renewed. The Company’s inability to preserve the current economics on renewal could expose the Company to significant cost increases in future years. Some of these contracts require the Company to make commitments on

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minimum volume of purchases based on Company forecasts. If the Company’s needs differ significantly from its forecasts, the Company would likely incur storage costs for excess production or contractual penalties that might be significant to Company financial results.

The Company’s Operations are Subject to Certain Operating Hazards Which Could Result in Unexpected Costs or Product Recalls That Could Harm the Company’s Business.
The Company’s operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging, or defective packaging and handling. Such occurrences may create bad tasting beer, hard seltzer or hard ciders, or pose health risk to the consumer or risk to the integrity and safety of the packaging. These could result in unexpected costs to the Company and, in the case of a costly product recall, potentially serious damage to the Company’s reputation for product quality, as well as product liability claims.
The Company initiates bottle deposits in some states and reuses glass bottles that are returned pursuant to certain state bottle recycling laws. The cost associated with reusing the glass varies. Relies Upon Complex Information Systems
The Company believesdepends on information technology to be able to operate efficiently and interface with customers and suppliers, as well as maintain financial and accounting reporting accuracy to ensure compliance with all applicable laws. If the Company does not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, the Company could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. The Company recognizes that it benefits economically from cleaningmany groups on a world-wide basis have experienced increases in cyber-attacks and reusing these bottles, whichother hacking activity. The Company has dedicated internal and external resources to review and address such threats. However, as with all large information technology systems, the Company’s systems could be penetrated by outside parties intent on extracting confidential or proprietary information, corrupting information, disrupting business processes, or engaging in the unauthorized use of strategic information. Such unauthorized access could disrupt business operations and could result in a lower cost than purchasing new glass, and that it benefits the environmentloss of assets or revenues, remediation costs or damage to the Company’s reputation, as well as litigation against the Company by the reduction in landfill usage, the reduction of usage of raw materials and the lower utility costs for reusing bottles versus producing new bottles. The economics of using recycled glass varies based on the cost of collection, sorting and handling, retailer, distributor and glass dealer behavior, the availability of equipment and service providers that will clean bottles for reuse, and may bethird parties adversely affected by changes in state regulation. Therethe unauthorized access. Such events could have a material adverse effect on the Company’s business and financial results. The Company also relies on third parties for supply of software, software and data hosting and telecommunications and networking, and is no guarantee thatreliant on those third parties for the current economicsquality and integrity of using returned glass will continue, or thatthese complex services. Failure by a third party supplier could have material adverse effects on the Company will continue its current used glass practices.

Company’s ability to operate.

An Increase in Energy Costs Could Harm the Company’s Financial Results.

In the last five years, the Company has experienced significant variation in direct and indirect energy costs, and energy costs could change unpredictably. Increased energy costs would result in higher transportation, freight and other operating costs, including increases in the cost of ingredients and supplies. The Company’s future operating expenses and margins could be dependent on its ability to manage the impact of such cost increases. If energy costs increase, there is no guarantee that such costs can be fully passed along to drinkers through increased prices.

The Company’s Advertising and Promotional Investments May Affect the Company’s Financial Results but Not be Effective.

The Company has made, and expects to continue to make, significant advertising and promotional expenditures to enhance its brands, even though these expenditures may adversely affect the Company’s results of operations in a particular quarter or even for the full year, and may not result in increased sales. Variations in the levels of advertising and promotional expenditures have in the past caused, and are expected in the future to continue to cause, variability in the Company’s quarterly results of operations. While the Company attempts to invest only in effective advertising and promotional expenditures, it is difficult to correlate such investments with sales results, and there is no guarantee that the Company’s expenditures will be effective in building brand equity or growing long term sales.

The Company’s Operations are Subject to Certain Operating Hazards Which Could Result in Unexpected Costs or Product Recalls That Could Harm the Company’s Business.

The Company’s operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging, or defective packaging and handling. Such occurrences may create bad tasting beer, hard cider or hard seltzer, or pose risk to the integrity and safety of the packaging. These could result in unexpected costs to the Company and, in the case of a costly product recall, potentially serious damage to the Company’s reputation for product quality, as well as product liability claims.

Changes in Tax, Environmental and Other Regulations, Government Shutdowns or Failure to Comply with Existing Licensing, Trade or Other Regulations Could Have a Material Adverse Effect on the Company’s Financial Condition.

The Company’s business is highly regulated by federal, state and local laws and regulations regarding such matters as licensing requirements, trade and pricing practices, labeling, advertising, promotion and marketing

practices, relationships with Distributors, environmental impact of operations and other matters. These laws and regulations are subject to frequent reevaluation, varying interpretations and political debate, and inquiries from governmental regulators charged with their enforcement. In addition, any delays in federal or state government

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required approvals caused by federal or state government shutdowns, similar to the January 2019 federal government shutdown, could prevent new brands or innovations from getting to market on time or at all. Failure to comply with existing laws and regulations relating to which the Company’s operations are subject or any revisions to such laws and regulations or the failure to pay taxes or other fees imposed on the Company’s operations and results could result in the loss, revocation or suspension of the Company’s licenses, permits or approvals, and could have a material adverse effect on the Company’s business, financial condition and results of operations. Changes in Federalfederal and other tax rates could have a significant effect on the Company’s financial results.

Changes in Public Attitudes and Drinker Tastes Could Harm the Company’s Business. Regulatory Changes in Response to Public Attitudes Could Adversely Affect the Company’s Business.

The alcoholic beverage industry has become the subject of considerable societal and political attention in recent years, due to increasing public concern over alcohol-related social problems, including driving under the influence, underage drinking and health consequences from the misuse of alcohol, including alcoholism. As an outgrowth of these concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed, that further restrictions on the sale of alcohol might be imposed or that there may be renewed efforts to impose increased excise or other taxes on beer sold in the United States.

The domestic beer industry, other than Better Beers, has experienced a slight decline in shipments over the last ten years. The Company believes that this slower growth is due to both declining alcohol consumption per person in the population and increased competition from wine and spirits companies. If beer consumption in general were to come into disfavor among domestic drinkers, or if the domestic beer industry were subjected to significant additional governmental regulations, the Company’s business could be materially adversely affected.

Certain states are considering or have passed laws and regulations that allow the sale and distribution of marijuana. It is possible that legal marijuana usage could adversely impact the demand for the Company’s products.

Impact of Changes in Drinker Attitudes on Brand Equity and Inherent Risk of Reliance on the Company’s Founder in the Samuel Adams® Brand Communications.

There is no guarantee that the brand equities that the Company has built in its brands will continue to appeal to drinkers. Changes in drinker attitudes or demands could adversely affect the strength of the Company’s brands and the revenue that is generated from that strength. It is possible that the Company could react to such changes and reposition its brands, but there is no certainty that the Company would be able to maintain volumes, pricing power and profitability. It is also possible that marketing messages or other actions taken by the Company could damage its brand equities, as opposed to building them. If such damage were to occur, it would likely have a negative effect on the financial condition of the Company.

In addition to these inherent brand risks, the founder and Chairman of the Company, C. James Koch, is an integral part of the Company’s Samuel Adams brand history, equity and current and potential future brand messaging and the Company relies on the positive public perception of its founder. The role of Mr. Koch as founder, brewer and leader of the Company is emphasized as part of the Company’s brand communication and has appeal to some drinkers. If Mr. Koch were not available to the Company to continue his active role, his absence could negatively affect the strength of the Company’s messaging and, accordingly, the Company’s growth prospects. The Company and its brands may also be impacted if drinkers’ views of Mr. Koch were to negatively change. If either of these were to occur, the Company might need to adapt its strategy for communicating its key messages regarding its traditional brewing processes, brewing heritage and quality. Any such change in the Company’s messaging strategy might have a detrimental impact on the future growth of the Company.

There Is No Guarantee that the Company Will notNot Face Litigation that Could Harm the Company’s Business.

While the Company has from time to time in the past been involved in material litigation, it is not currently a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations. In general, while the Company believes it conducts its business appropriately in accordance with laws, regulations and industry guidelines, claims, whether or not meritorious, could be asserted against the Company that might adversely impact the Company’s results. See
Item 3 —- Legal Proceedings
below.

The Class B Shareholder Has Significant InfluenceControl over the Company.

Company

The Company’s Class A Common Stock is not entitled to any voting rights except for the right as a class to (1) approve certain mergers, charter amendments and
by-law
amendments and (2) elect a minority of the directors of the Company. Although not as a matter of right, the Class A stockholders have also been afforded the opportunity to vote on an advisory basis on executive compensation. Consequently, the election of a majority of the Company’s directors and all other matters requiring stockholder approval are currently decided by C. James Koch, who is the founder and Chairman of the Company, as the holder of 100% of the voting rights to the outstanding shares of the Company’s Class B Common Stock. As a result, Mr. Koch is able to exercise substantial influence over all matters requiring stockholder approval, including the composition of the board of directors, approval of equity-based and other executive compensation and other significant corporate and governance matters, such as approval of the Company’s independent registered public accounting firm. This could have the effect of delaying or preventing a change in control of the Company and makes most material transactions difficult or impossible to accomplish without the support of Mr. Koch. In addition,While Mr. Koch could transferis currently the 100% holder of the Company’s Class B Common Stock, there is nothing that prevents Mr. Koch or his heirs from transferring some or all shares of the Class B Common Stock to others, which could impact the nature of the control currently held by him as the sole holder of the Class B Common Stock.

others.

The Company’s Operating Results and Cash Flow May Be Adversely Affected by Unfavorable Economic, Financial and FinancialSocietal Market Conditions.

Volatility and uncertainty in the financial markets and economic conditions may directly or indirectly affect the Company’s performance and operating results in a variety of ways, including: (a) prices for energy and agricultural products may rise faster than current estimates, including increases resulting from currency fluctuations; (b) the Company’s key suppliers may not be able to fund their capital requirements, resulting in disruption in the supplies of the Company’s raw and packaging materials; (c) the credit risks of the Company’s Distributors may increase; (d) the impact of currency fluctuations on amounts owed to the Company by distributors that pay in foreign currencies; (e) the Company’s credit facility, or portion thereof, may become unavailable at a time when needed by the Company to meet critical needs; (f) overall beer consumption may decline; or (g) drinkers of the Company’s beersproducts may change their purchase preferences and frequency, which might result in sales declines.

The Company Relies Upon Complex Information Systems.

The Company depends on information technology to be able to operate efficiently and interface with customers and suppliers, as well as maintain financial and accounting reporting accuracy to ensure compliance with all applicable laws. If the Company does not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, the Company could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. The Company recognizes that many groups on a world-wide basis have experienced increases in cyber attacks and other hacking activity. The Company has dedicated internal and external resources to review and address such threats. However, as with all large information technology systems, the Company’s systems could be penetrated by outside parties intent on extracting confidential or proprietary information, corrupting information, disrupting business processes, or engaging in the unauthorized use of strategic

information. Such unauthorized access could disrupt business operations and could result in the loss of assets or revenues, remediation costs or damage to the Company’s reputation, as well as litigation against the Company by third parties adversely affected by the unauthorized access. Such events could have a material adverse effect on the Company’s business and financial results. The Company also relies on third parties for supply of software, software and data hosting and telecommunications and networking, and is reliant on those third parties for the quality and integrity of these complex services. Failure by a third party supplier could have material adverse effect on the Company’s ability to operate.

Item 1B.Unresolved Staff Comments

The Company has not received any written comments from the staff of the Securities and Exchange Commission (the “SEC”) regarding the Company’s periodic or current reports that (1) the Company believes are material,
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(2) were issued not less than 180 days before the end of the Company’s 20162019 fiscal year, and (3) remain unresolved.

Item 2.Properties

The Company maintains its principal corporate offices in approximately 54,200 square feet of leased space located in Boston, Massachusetts, the term of which is set to expire in 2026. The Company also leases small offices in California and Vermont.

The Company maintains a brewery and tour center in Boston, Massachusetts in approximately 43,000 square feet of leased space. The current term of the lease for this facility will expire in 2019, although it has an option to extend the term for an additional five years.

2031.

The Company owns approximately 76 acres of land in Breinigsville, Pennsylvania, consisting of the two parcels on which the Company’s Pennsylvania Brewery is located. The buildings on this property consist of approximately 1 million square feet of brewery and warehouse space.

The Company owns approximately 57 acres of land in Milton, Delaware, consisting of the two parcels on which the Company’s Milton Brewery is located. The buildings on this property consist of approximately 240,000 square feet of brewery and warehouse space.
The Company owns approximately 10 acres of land in Cincinnati, Ohio, on which the Company’s Cincinnati Brewery is located, and leases, with an option to purchase, approximately 1 acre of land from the City of Cincinnati which abuts its property. The buildings on this property consist of approximately 128,500 square feet of brewery and warehouse space.

The Company owns approximately 62 acres of land in Walden, New York, consisting of an apple orchard and certain buildings, including a small cidery and tour center. The small cidery and tour center on this property consist of approximately 15,000 square feet of space.

The Company owns approximately 1 acre of land in Lewes, Delaware, on which the Company’s Dogfish Head Inn is located. The buildings on this property consists of approximately 8,400 square feet of space.
The Company leases approximately 48,65043,000 square feet of space in Los Angeles, California,Boston, Massachusetts, on which housesit maintains a small brewery, beer hallSamuel Adams brand tap room and tour center. The current term of the lease for this facility will expire in 2021.

2029, although it has an option to extend the term for an additional fifteen years in five year increments.

The Company leases approximately 11,36548,650 square feet of space in Miami, Florida,Los Angeles, California, on which houses ait maintains an Angel City brand tap room, small brewery beer hall and tour center. The current term of the lease for this facility will expire in 2023.

2021.

The Company leases approximately 2,10011,365 square feet of space in Miami, Florida, on which it maintains a Concrete Beach brand tap room, small brewery and tour center. The current term of the lease for this facility will expire in 2023.
The Company leases approximately 9,000 square feet of space in Boston, Massachusetts, on which it maintains a Samuel Adams brand tap room and small brewery. The current term of the lease for this facility will expire in 2028, although it has two options to extend the term for an additional 5 years.
The Company leases approximately 8,900 square feet of space in Cincinnati, Ohio, on which it maintains a Samuel Adams brand tap room and small brewery. The current term of the lease for this facility will expire in 2028.
The Company leases approximately 7,100 square feet of space within the retail section of MCU Park in Brooklyn, New York on which housesit maintains a Coney Island brand tap room and small brewery and tasting room.brewery. The current term of the lease for this facility will expire in 2019.

2020, although it has an option to extend the term for an additional 5 years.

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The Company leases approximately 4,490 square feet of space in Rehoboth, DE, on which it maintains Dogfish Head Brewing and Eats, a tap room small brewery and the Chesapeake & Maine restaurant. The current term of the lease for this facility will expire in 2029.
The Company also leases a small office in Burlington, Vermont and Montreal, Quebec.
The Company believes that its facilities are adequate for its current needs and that suitable additional space will be available on commercially acceptable terms as required.

Item 3.Legal Proceedings

The Company is currently not a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations.

Item 4.Mine Safety Disclosures

Not Applicable

PART II.

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The graph set forth below shows the value of an investment of $100 on January 1, 20122015 in each of the Company’s stock (“The Boston Beer Company, Inc.”), the Standard & Poor’s 500 Index (“S&P 500 Index”), the Standard & Poor’s 500 Beverage Index, which consists of producers of alcoholic and
non-alcoholic
beverages (“S&P 500 Beverages Index”) and a custom peer group which consists of Molson Coors BrewingBeverage Company and Craft Brewers Alliance, Inc. (formerly Redhook Ale Brewery, Inc.), the two remaining U.S. publicly-traded brewing companies (“Peer Group”), for the five years ending December 31, 2016.

28, 2019.

Total Return To Shareholders

(Includes reinvestment of dividends)

   

ANNUAL RETURN PERCENTAGE

Years Ending

 

Company Name / Index

  12/29/12   12/28/13   12/27/14   12/26/15   12/31/16 

The Boston Beer Company, Inc.

   22.49     82.06     22.16     -30.55     -17.31  

S&P 500 Index

   14.07     34.12     15.76     0.77     11.07  

S&P 500 Beverages Index

   7.16     22.48     19.04     10.52     1.77  

Peer Group

   1.17     36.24     37.43     25.24   �� 6.10  

   Base   

INDEXED RETURNS

Years Ending

 

Company Name / Index

  Period
12/31/11		   12/29/12   12/28/13   12/27/14   12/26/15   12/31/16 

The Boston Beer Company, Inc.

   100     122.49     223.01     272.42     189.20     156.46  

S&P 500 Index

   100     114.07     153.00     177.10     178.46     198.21  

S&P 500 Beverages Index

   100     107.16     131.25     156.24     172.68     175.74  

Peer Group

   100     101.17     137.83     189.42     237.22     251.68  

Peer Group Companies

Craft Brew Alliance Inc

Molson Coors Brewing Co

                     
 
ANNUAL RETURN PERCENTAGE
Years Ending
 
Company Name / Index
 
12/26/15
  
12/31/16
  
12/30/17
  
12/29/18
  
12/28/19
 
The Boston Beer Company, Inc.
  
-30.55
   
-17.31
   
12.51
   
24.97
   
58.59
 
S&P 500 Index
  
0.77
   
11.07
   
21.83
   
-5.20
   
32.97
 
S&P 500 Beverages Index
  
10.52
   
1.77
   
18.84
   
-3.29
   
23.99
 
Peer Group
  
25.35
   
6.10
   
-13.68
   
-30.08
   
0.20
 
                         
   
INDEXED RETURNS
Years Ending
 
Company Name / Index
 
Base
Period
12/27/14
  
12/26/15
  
12/31/16
  
12/30/17
  
12/29/18
  
12/28/19
 
The Boston Beer Company, Inc.
  
100
   
69.45
   
57.43
   
64.62
   
80.75
   
128.07
 
S&P 500 Index
  
100
   
100.77
   
111.92
   
136.35
   
129.26
   
171.88
 
S&P 500 Beverages Index
  
100
   
110.52
   
112.48
   
133.67
   
129.27
   
160.29
 
Peer Group
  
100
   
125.35
   
133.00
   
114.81
   
80.27
   
80.43
 
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Peer Group Companies
Craft Brew Alliance Inc
Molson Coors Brewing Company
The Company’s Class A Common Stock is listed for trading on the New York Stock Exchange. The Company’s NYSEExchange under the symbol is SAM. For the fiscal periods indicated, the high and low per share sales prices for the Class A Common Stock of The Boston Beer Company, Inc. as reported on the New York Stock Exchange-Composite Transaction Reporting System were as follows:

Fiscal 2016

  High   Low 

First Quarter

  $204.25   $163.55 

Second Quarter

  $191.71   $146.42 

Third Quarter

  $192.05   $151.06 

Fourth Quarter

  $178.00   $149.76 

Fiscal 2015

  High   Low 

First Quarter

  $323.99   $257.24 

Second Quarter

  $272.83   $237.62 

Third Quarter

  $236.55   $197.05 

Fourth Quarter

  $258.43   $201.90 

There were 10,5268,477 holders of record of the Company’s Class A Common Stock as of February 17, 2017.14, 2020. Excluded from the number of stockholders of record are stockholders who hold shares in “nominee” or “street” name. The closing price per share of the Company’s Class A Common Stock as of February 17, 2017,14, 2020, as reported under the New York Stock Exchange-Composite Transaction Reporting System, was $169.75.

$408.91.

Class A Common Stock

At December 31, 2016,28, 2019, the Company had 22,700,000 authorized shares of Class A Common Stock with a par value of $.01, of which 9,235,9249,470,397 were issued and outstanding, which includes 64,96899,871 shares that have trading restrictions. The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that the approval of the holders of the Class A Common Stock is required for (a) future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) alterations of rights or terms of the Class A or Class B Common Stock as set forth in the Articles of

Organization of the Company, (c) certain other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Company’s assets.

Class B Common Stock

At December 31, 2016,28, 2019, the Company had 4,200,000 authorized shares of Class B Common Stock with a par value of $.01, of which 3,197,3552,672,983 shares were issued and outstanding. The Class B Common Stock has full
27
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voting rights, including the right to (1) elect a majority of the members of the Company’s Board of Directors and (2) approve all (a) amendments to the Company’s Articles of Organization, (b) mergers or consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Company’s assets and, (d) equity-based and other executive compensation, and other significant corporate matters, such as approval of the Company’s independent registered public accounting firm. The Company’s Class B Common Stock is not listed for trading. Each share of Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of any Class B holder.

As of February 17, 2017,14, 2020, C. James Koch, the Company’s Chairman, was the direct or indirect holder of record of all of the Company’s issued and outstanding Class B Common Stock.

The holders of the Class A and Class B Common Stock are entitled to dividends, on a
share-for-share
basis, only if and when declared by the Board of Directors of the Company out of funds legally available for payment thereof. Since its inception, the Company has not paid dividends and does not currently anticipate paying dividends on its Class A or Class B Common Stock in the foreseeable future.

Repurchases of the Registrants Class A Common Stock

In 1998, the Board of Directors authorized management to implement a stock repurchase program with a limit of $931.0 million. As of December 31, 2016,28, 2019, the Company has repurchased a cumulative total of approximately 12.513.8 million shares of its Class A Common Stock for an aggregate purchase price of approximately $607.8$840.7 million.

During the twelve months ended December 31, 2016,28, 2019, the Company repurchased 948,117900 shares of its Class A Common Stock as illustrated in the table below:

Period

  Total
Number of
Shares
Purchased		   Average
Price Paid
per Share		   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs		   Approximate Dollar Value
of Shares that May Yet be
Purchased Under the
Plans or Programs		 

December 27, 2015 to January 30, 2016

   129,322    $178.33     128,798    $55,912,890  

January 31, 2016 to February 27, 2016

   103,605     183.12     103,328     86,961,273  

February 28, 2016 to March 26, 2016

   100,719     187.34     100,407     68,215,806  

March 27, 2016 to April 30, 2016

   143,676     173.98     143,352     54,167,002  

May 1, 2016 to May 28, 2016

   130,318     153.69     129,964     34,182,017  

May 29, 2016 to June 25, 2016

   119,987     158.41     119,519     15,231,260  

June 26, 2016 to July 30, 2016

   28,020     168.85     27,723     25,533,994  

July 31, 2016 to August 27, 2016

   12,876     184.54     12,732     23,175,199  

August 28, 2016 to September 24, 2016

   20,025     166.41     19,961     19,851,706  

September 25, 2016 to October 29, 2016

   35,165     156.84     35,109     194,341,191  

October 30, 2016 to November 26, 2016

   25,252     165.03     25,241     190,173,900  

November 27, 2016 to December 31, 2016

   99,152     171.16     98,742     173,248,179  
  

 

 

     

 

 

   

Total

   948,117    $170.89     944,876    $173,248,179  
  

 

 

     

 

 

   

Of the

                 
Period
 
Total
Number of
Shares
Purchased
  
Average
Price Paid
per Share
  
Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
  
Dollar Value
of Shares that
May Yet be Purchased
Under the Plans or
Programs
(in thousands)
 
December 30, 2018 to February 2, 2019
  
116
  $
 127.05
   
—  
  $
 90,335
 
February 3, 2019 to March 2, 2019
  
219
   
115.78
   
—  
   
90,335
 
March 3, 2019 to March 30, 2019
  
13
   
187.54
   
—  
   
90,335
 
March 31, 2019 to May 4, 2019
  
107
   
182.03
   
—  
   
90,335
 
May 5, 2019 to June 1, 2019
  
79
   
175.67
   
—  
   
90,335
 
June 2, 2019 to June 29, 2019
  
32
   
187.54
   
—  
   
90,335
 
June 30, 2019 to August 3, 2019
  
73
   
114.14
   
—  
   
90,335
 
August 4, 2019 to August 31, 2019
  
261
   
135.26
   
—  
   
90,335
 
September 1, 2019 to September 28, 2019
  
—  
   
—  
   
—  
   
90,335
 
September 29, 2019 to November 2, 2019
  
—  
   
—  
   
—  
   
90,335
 
November 3, 2019 to November 30, 2019
  
—  
   
—  
   
—  
   
90,335
 
December 1, 2019 to December 28, 2019
  
—  
   
—  
   
—  
   
90,335
 
                 
Total
  
900
      
0
  $
90,335
 
                 
All shares that were purchased during the period 3,241 shares represent repurchases of
unvested
investment shares issued under the Investment Share Program of the Company’s Employee Equity Incentive Plan.

28
Table of Contents
Item 6.Selected Consolidated Financial Data

   Year Ended 
   Dec. 31
2016 (53
weeks)		  Dec. 26
2015		  Dec. 27
2014		  Dec. 28
2013		  Dec. 29
2012		 
   (in thousands, except per share and net revenue per barrel data) 

Income Statement Data:

      

Revenue

  $968,994   $1,024,040   $966,478   $793,705   $628,580  

Less excise taxes

   62,548    64,106    63,471    54,652    48,358  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net revenue

   906,446    959,934    903,007    739,053    580,222  

Cost of goods sold

   446,776    458,317    437,996    354,131    265,012  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   459,670    501,617    465,011    384,922    315,210  

Operating expenses:

      

Advertising, promotional and selling expenses

   244,213    273,629    250,696    207,930    169,306  

General and administrative expenses

   78,033    71,556    65,971    62,332    50,171  

Impairment (gain on sale) of assets, net

   (235)   258    1,777    1,567    149  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   322,011    345,443    318,444    271,829    219,626  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   137,659    156,174    146,567    113,093    95,584  

Other expense, net

   (538)   (1,164)   (973)   (552)   (67) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes

   137,121    155,010    145,594    112,541    95,517  

Provision for income taxes

   49,772    56,596    54,851    42,149    36,050  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $87,349   $98,414   $90,743   $70,392   $59,467  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per share — basic

  $6.93   $7.46   $6.96   $5.47   $4.60  

Net income per share — diluted

  $6.79   $7.25   $6.69   $5.18   $4.39  

Weighted average shares outstanding — basic

   12,533    13,123    12,968    12,766    12,796  

Weighted average shares outstanding — diluted

   12,796    13,520    13,484    13,504    13,435  

Balance Sheet Data:

      

Working capital

  $99,719   $112,443   $97,292   $59,901   $73,448  

Total assets

  $623,297   $645,400   $605,161   $444,075   $359,484  

Total long-term obligations

  $75,196   $73,019   $58,851   $37,613   $25,499  

Total stockholders’ equity

  $446,582   $461,221   $436,140   $302,085   $245,091  

Statistical Data:

      

Barrels sold

   4,019    4,256    4,103    3,416    2,746  

Net revenue per barrel

  $225.55   $225.55   $220.08   $216.35   $211.30  

                     
 
Year Ended
 
 
Dec. 29

2018
  
Dec. 29

2018
  
Dec. 30

2017

(53 weeks)
  
Dec. 31

2016
  
Dec. 26

2015
 
 
(in thousands, except per share and net revenue per barrel data)
 
Income Statement Data:
               
Revenue
 $
1,329,108
  $
1,057,495
  $
921,736
  $
968,994
  $
1,024,040
 
Less excise taxes
  
79,284
   
61,846
   
58,744
   
62,548
   
64,106
 
                     
Net revenue
  
1,249,824
   
995,649
   
862,992
   
906,446
   
959,934
 
Cost of goods sold
  
635,658
   
483,406
   
413,091
   
446,776
   
458,317
 
                     
Gross profit
  
614,166
   
512,243
   
449,901
   
459,670
   
501,617
 
Operating expenses:
               
Advertising, promotional and selling expenses
  
355,613
   
304,853
   
258,649
   
244,213
   
273,629
 
General and administrative expenses
  
112,730
   
90,857
   
73,126
   
78,033
   
71,556
 
Impairment (gain on sale) of assets, net
  
911
   
652
   
2,451
   
(235
)  
258
 
                     
Settlement proceeds
  
—  
   
—  
   
—  
   
—  
   
—  
 
Total operating expenses
  
469,254
   
396,362
   
334,226
   
322,011
   
345,443
 
                     
Operating income
  
144,912
   
115,881
   
115,675
   
137,659
   
156,174
 
Other (expense) income, net
  
(542
)  
405
   
467
   
(538
)  
(1,164
)
                     
Income before provision for income taxes
  
144,370
   
116,286
   
116,142
   
137,121
   
155,010
 
Provision for income taxes
  
34,329
   
23,623
   
17,093
   
49,772
   
56,596
 
                     
Net income
 $
110,041
  $
92,663
  $
99,049
  $
87,349
  $
98,414
 
                     
Net income per share - basic
 $
9.26
  $
7.90
  $
8.18
  $
6.93
  $
7.46
 
Net income per share - diluted
 $
9.16
  $
7.82
  $
8.09
  $
6.79
  $
7.25
 
Weighted average shares outstanding - basic
  
11,781
   
11,622
   
12,035
   
12,533
   
13,123
 
Weighted average shares outstanding - diluted
  
11,908
   
11,734
   
12,180
   
12,796
   
13,520
 
Balance Sheet Data:
               
Working capital
 $
37,999
  $
111,057
  $
66,590
  $
99,719
  $
112,443
 
Total assets
 $
1,054,057
  $
639,851
  $
569,624
  $
623,297
  $
645,400
 
Total long-term obligations
 $
83,832
  $
59,020
  $
44,343
  $
75,196
  $
73,019
 
Total stockholders’ equity
 $
735,636
  $
460,317
  $
423,523
  $
446,582
  $
461,221
 
Statistical Data:
               
Barrels sold
  
5,307
   
4,286
   
3,768
   
4,019
   
4,256
 
Net revenue per barrel
 $
235.51
  $
232.30
  $
229.05
  $
225.55
  $
225.55
 
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In this Form
10-K
and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future 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-

lookingforward-looking statements, involve risks and uncertainties that could cause actual results

29
Table of Contents
to differ materially from those projected or anticipated. Such risks and uncertainties include the factors set forth above and the other information set forth in this Form
10-K.

Introduction

The Boston Beer Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and, to a lesser extent, in selected international markets. The Company’s revenues are primarily derived by selling its beers, hard cidersseltzers and hard seltzersciders to Distributors, who in turn sell the products to retailers and drinkers.

The Company completed the previously reported Dogfish Head Brewery transaction and began consolidating the Dogfish Head financial results on July 3, 2019.

The Company’s alcohol beverages competebeers, hard seltzers and hard ciders are primarily positioned in the Better Beer category, which includes imported beers and craft beers. Thismarket for High End beer occasions. The High End category has seen high single-digit compounded annual growth over the past ten years. Defining factors for Better Beer include superior quality, image and taste, supported by appropriate pricing. The Company believes that the Better BeerHigh End category is positioned to increase market share in the total beer category, as drinkers continue to trade up in taste and quality. Boston Beer is one of the largest suppliers in the High End category in the United States. The Company estimates that in 20162019 the craft beerHigh End category percentage volume growth was approximately 7% and11% with the Better Beercraft beer category percentage volume growth was approximately 6%, while the5% and total beer category volume was essentially flat.growth approximately 2%. The Company believes that the Better BeerHigh End category volume is approximately 29%over 30% of the United States beer consumption by volume. The Company estimates the Hard Cider category to be less than 1% of the total beer category and believes it has many characteristics similar to the Better Beer category. The Company believes that significant opportunity continues to exist for the Better Beer and Hard Cider categories to gain market share in the total beer category.market. Depletions or Distributor sales to retailers of the Company’s beers, hard cidersseltzers and hard seltzersciders for the 5352 week fiscal period ended December 31, 2016, decreased28, 2019, increased approximately 5%22% from the comparable 52 week fiscal period in the prior year.

year, of which 19% is from Boston Beer legacy brands and 3% is from the addition of Dogfish Head brands beginning July 3, 2019.

Outlook

Year-to-date
depletions reported to the Company for the 6 weeks ended February 11, 20178, 2020 are estimated by the Company to have decreasedincreased approximately 15%34% from the comparable weeks in 2016.

2019. Excluding the Dogfish Head impact, depletions increased 28%.

The Company is targeting
Non-GAAP
earnings per diluted share for 20172020 of between $4.20$10.70 and $6.20,$11.70, excluding the impact of ASU
2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
, but actual results could vary significantly from this target. The 2017 fiscal year includes only 52 weeks compared to the 2016 fiscal year which included 53 weeks. The Company is currently planning that 2017forecasting 2020 depletions and shipments percentage change will beincreases of between minus 7%15% and plus 1%25%. Excluding the addition of the Dogfish Head brands, 2020 depletions and shipment growth is estimated between 11% and 21%. The Company is targeting national price increases of between 1% and 2%3%. Full-year 20172020 gross margins are currently expected to be between 51%49% and 52%51%. The Company intends to increase advertising, promotional and selling expenses by between $20$80 million and $30$90 million for the full year 2017,2020, an increase from the previously communicated estimate of between $65 million and $75 million, which does not include any increases in freight costs for the shipment of products to its Distributors. The Company intends to increase its investment in its brands in 20172020 commensurate with the opportunities for growth that it sees, but there is no guarantee that such increased investments will result in increased volumes. The Company estimates a full-year 2017 2020
Non-GAAP
effective tax rate of approximately 37%27%, which excludesexcluding the impact of the new Accounting Standard “Employee Share-Based Payment Accounting” (“ASU2016-09”) which is effective for the company on January 1, 2017. The Company is not currently planning to provide forward guidance on the impact that ASU2016-09 will have on the Company’s 2017 financial statements
2016-09.
Non-GAAP
earnings per diluted share and full-year
Non-GAAP
effective tax rate are not defined terms under U.S. generally accepted accounting principles (“GAAP”). These
Non-GAAP
measures should not be considered in isolation or as thisa substitute for diluted earnings per share and effective tax rate data prepared in accordance with GAAP, and may not be comparable to calculations of similarly titled measures by other companies. Management believes these
Non-GAAP
measures provide meaningful and useful information to investors and analysts regarding our outlook and facilitate period to period comparisons of our forecasted financial performance.
Non-GAAP
earnings per diluted share and
Non-GAAP
effective tax rate exclude the potential impact of ASU
2016-09,
which could be significant and will mainly depend largely upon unpredictable future events outside the Company’s control, including the timing and value realized upon exercise of stock options versus the fair value whenof those options werewhen granted.

Therefore, because of the uncertainty and variability of the impact of ASU

2016-09,
the Company is unable to provide, without unreasonable effort, a reconciliation of these
Non-GAAP
measures on a forward-looking basis.
30
Table of Contents
The Company is continuing to evaluate 20172020 capital expenditures. Its current estimates are between $40$135 million and $60$155 million, an increase in the previously communicated estimate of between $95 million and $115 million, consisting mostly of continued investments in capacity and efficiency improvements at the Company’s breweries. The actual total amount spent on 20172020 capital expenditures may well be different from these estimates. Based on information currently available, the Company believes that its capacity requirements for 20172020 can be covered by its Company-owned breweries and existing contracted capacity at third-party brewers.

Results of Operations

Year Ended December 31, 2016 (53 weeks)28, 2019 Compared to Year Ended December 26, 2015 (52 weeks)

  Year Ended
(in thousands, except per barrel)		          
  Dec. 31
2016
(53 weeks)		  Dec. 26
2015
(52 weeks)		  Amount
change		  % change  Per barrel
change		 

Barrels sold

  4,019      4,256      (237)   -5.6%  
     Per
barrel		  % of net
revenue		     Per
barrel		  % of net
revenue		          

Net revenue

 $906,446   $225.55    100.0%  $959,934   $225.55    100.0%  $(53,488)   -5.6%  $—    

Cost of goods

  446,776    111.17    49.3%   458,317    107.69    47.7%   (11,541)   -2.5%   3.48  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  459,670    114.38    50.7%   501,617    117.86    52.3%   (41,947)   -8.4%   (3.48) 

Advertising, promotional and selling expenses

  244,213    60.77    26.9%   273,629    64.29    28.5%   (29,416)   -10.8%   (3.52) 

General and administrative expenses

  78,033    19.42    8.6%   71,556    16.81    7.5%   6,477    9.1%   2.61  

Impairment (gain on sale) of assets, net

  (235)   (0.06)   0.0%   258    0.06    0.0%   (493)   -191.1%  

 

(0.12

) 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

  322,011    80.13    35.5%   345,443    81.17    36.0%   (23,432)   -6.8%   (1.04) 

Operating income

  137,659    34.25    15.2%   156,174    36.70    16.3%   (18,515)   -11.9%   (2.45) 

Other expense, net

  (538)   (0.13)   -0.1%   (1,164)   (0.27)   -0.1%   626    -53.8%   0.14  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes

  137,121    34.12    15.1%   155,010    36.42    16.1%   (17,889)   -11.5%   (2.30) 

Provision for income taxes

  49,772    12.38    5.5%   56,596    13.30    5.9%   (6,824)   -12.1%   (0.92) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

 $87,349   $21.74    9.6%  $98,414   $23.12    10.3%  $(11,065)   -11.2%  $(1.38) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

29, 2018

                                     
 
Year Ended
(in thousands, except per barrel)
       
 
Dec. 28
2019
  
Dec. 29
2018
  
Amount
change
  
% change
  
Per barrel
change
 
Barrels sold
  
5,307
         
4,286
         
1,021
   
23.8
%   
   
Per barrel
  
% of net
revenue
    
Per barrel
  
% of net
revenue
       
Net revenue
 $
 1,249,824
  $
 235.51
   
100.0
% $
 995,649
  $
 232.30
   
100.0
% $
 254,175
   
25.5
% $
3.21
 
Cost of goods
  
635,658
   
119.78
   
50.9
%  
483,406
   
112.79
   
48.6
%  
152,252
   
31.5
%  
6.99
 
                                     
Gross profit
  
614,166
   
115.73
   
49.1
%  
512,243
   
119.52
   
51.4
%  
101,923
   
19.9
%  
(3.79
)
Advertising, promotional and selling expenses
  
355,613
   
67.01
   
28.5
%  
304,853
   
71.13
   
30.6
%  
50,760
   
16.7
%  
(4.12
)
General and administrative expenses
  
112,730
   
21.24
   
9.0
%  
90,857
   
21.20
   
9.1
%  
21,873
   
24.1
%  
0.04
 
Impairment of assets, net
  
911
   
0.17
   
0.1
%  
652
   
0.15
   
0.1
%  
259
   
39.7
%  
0.02
 
                                     
Total operating expenses
  
469,254
   
88.42
   
37.5
%  
396,362
   
92.48
   
39.8
%  
72,892
   
18.4
%  
(4.06
)
Operating income
  
144,912
   
27.31
   
11.6
%  
115,881
   
27.04
   
11.6
%  
29,031
   
25.1
%  
0.27
 
Other (expense) income, net
  
(542
)  
(0.10
)  
0.0
%  
405
   
0.09
   
0.0
%  
(947
)  
-233.8
%  
(0.19
)
                                     
Income before provision for income taxes
  
144,370
   
27.20
   
11.6
%  
116,286
   
27.13
   
11.7
%  
28,084
   
24.2
%  
0.07
 
Provision for income taxes
  
34,329
   
6.47
   
2.7
%  
23,623
   
5.51
   
2.4
%  
10,706
   
45.3
%  
0.96
 
                                     
Net income
 $
110,041
  $
20.74
   
8.8
% $
92,663
  $
21.62
   
9.3
% $
17,378
   
18.8
% $
 (0.88
)
                                     
Net revenue.
Net revenue decreasedincreased by $53.5$254.2 million, or 5.6%25.5%, to $906.4$1,249.8 million for the year ended December 31, 2016,28, 2019, as compared to $959.9$995.6 million for the year ended December 26, 2015,29, 2018, due primarily to decreasedincreased shipments.

Volume.
Total shipment volume of 4,019,0005,307,000 barrels for the year ended December 31, 2016 decreased28, 2019 increased by 5.6%23.8% over comparable 20152018 levels of 4,256,0004,286,000 barrels, due primarilyto decreasesprimarily
to increases in shipments of Samuel Adams, Angry Orchard, Coney IslandTruly Hard Seltzer and Traveler brand products that were onlyTwisted Tea and the addition of the Dogfish Head brands, partially offset by shipment increasesdecreases in Twisted Teaits Samuel Adamas and Truly Spiked & Sparkling brand products.

Angry Orchard brands.

Depletions, or sales by Distributors to retailers, of the Company’s products for the year ended December 31, 2016 decreased28, 2019 increased by approximately 5%22% compared to the prior year, primarily due to decreases in depletions of Samuel Adams, Angry Orchard, Traveler and Coney Island brand products that were only partially offset by increases in depletions of Truly Hard Seltzer and Twisted Tea brands and Truly Spiked & Sparkling brand products.

the addition of the Dogfish Head brands, partially offset by decreases in its Samuel Adams and Angry Orchard brands.

Net Revenue per barrel.
The net revenue per barrel remained flat at $225.55increased by 1.4% to $235.51 per barrel for the year ended December 31, 2016, when28, 2019, as compared to $232.30 per barrel for the year ended December 26, 2015. This was29, 2018, primarily due primarily to price increases and package mix effects that were offset by product mix effects and increased returns.

increases.


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Significant changes in the package mix could have a material effect on net revenue. The Company primarily packages its products in kegs, bottles and cans. Assuming the same level of production, a shift in the mix from kegs to bottles and cans would effectively increase revenue per barrel, as the price per equivalent barrel is lower

for kegs than for bottles and cans. The percentage of bottles and cans to total shipments increased by 1.5%4.3% to 80.2%89.4% of total shipments for the year ended December 31, 201628, 2019 as compared to the year ended December 26, 2015.

Gross profit.Gross profit29, 2018.

Cost of goods sold.
Cost of goods sold was $114.38$119.78 per barrel for the year ended December 31, 2016,28, 2019, as compared to $117.86$112.79 per barrel for the year ended December 26, 2015. Gross margin was 50.7% for the year ended December 31, 2016, as compared to 52.3% for the year ended December 26, 2015.29, 2018. The decrease in gross profit per barrel of $3.48 is primarily due to an2019 increase in cost of goods sold of $6.99 or 6.2% per barrel.

Costbarrel was primarily the result of goods sold forhigher processing costs due to increased production at third party breweries and higher temporary labor at Company-owned breweries to support increased variety pack volumes, partially offset by cost saving initiatives at Company-owned breweries.

Gross profit.
Gross profit was $111.17$115.73 per barrel for the year ended December 31, 2016,28, 2019, as compared to $107.69$119.52 per barrel for the year ended December 26, 2015. The 2016 increase in cost of goods sold of $3.48 per barrel is29, 2018. Gross margin was 49.1% for the result of unfavorable fixed cost absorption and product mix effects partially offset by cost saving initiatives inyear ended December 28, 2019, as compared to 51.4% for the Company’s breweries.

year ended December 29, 2018.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s 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, decreased $29.4increased $50.8 million, or 10.8%16.7%, to $244.2$355.6 million for the year ended December 31, 2016,28, 2019, as compared to $273.6$304.9 million for the year ended December 26, 2015.29, 2018. The decreaseincrease was primarily the result of decreasesincreased investments in media, production and local marketing, higher salaries and benefits costs, increased freight to distributors due to lower volumehigher volumes and lower freight rates and lower media advertising andpoint-of-sale spending.

the addition of Dogfish Head brand related expenses beginning July 3, 2019.

Advertising, promotional and selling expenses were 26.9%28.5% of net revenue, or $60.77$67.01 per barrel, for the year ended December 31, 2016,28, 2019, as compared to 28.5%30.6% of net revenue, or $64.29$71.13 per barrel, for the year ended December 26, 2015.29, 2018. 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.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to between 2% and 4%3% of net sales. The Company may adjust its promotional efforts in the Distributors’ 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 $6.5$21.9 million, or 9.1%24.1%, to $78.0$112.7 million for the year ended December 31, 2016,28, 2019, as compared to $71.6$90.9 million for the comparable period in 2015.2018. The increase was primarily due to
non-recurring
Dogfish Head Transaction-related expenses of $7.7 million, increases in salarysalaries and benefits costs, and facilities costs.

Gain on salethe addition of Dogfish Head general and administrative expenses beginning July 3, 2019.

Impairment of assets.
For the year ended December 31, 2016, the Company recognized a $1.0 million gain on the sale of land owned in Freetown, Massachusetts.

Impairment of assets.For the year ended December 31, 2016,28, 2019, the Company incurred impairment charges of $0.7$0.9 million, based upon its review of the carrying values of its property, plant and equipment.

These impairment charges were primarily due to the write-down of brewery equipment at the Company’s Pennsylvania and Cincinnati breweries.

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Stock-based compensation expense.
For the year ended December 31, 2016,28, 2019, an aggregate of $6.2$12.3 million in stock-based compensation expense is included in advertising, promotional and selling expenses and general and administrative expenses. Stock compensation decreasedincreased by $0.5$2.3 million in 20162019 compared to 2015,2018, primarily due to cancellationachievement of unvested equity awards upon departure of key employees partially offset by new equity awards granted in 2016.

performance-based awards.

Provision for income taxes.
The Company’s effective tax rate increased to 23.8% for the year ended December 31, 2016 of 36.3% decreased28, 2019 from the year ended December 26, 2015rate of approximately 36.5%. This decrease was due to a slight decrease in tax valuation reserves during 2016.

Year Ended December 26, 2015 (52 weeks) Compared to Year Ended December 27, 2014 (52 weeks)

  Year Ended
(in thousands, except per barrel)		          
  Dec. 26
2015
(52 weeks)		  Dec. 27
2014
(52 weeks)		  Amount
change		  % change  Per barrel
change		 

Barrels sold

  4,256      4,103      153    3.7%  
     Per
barrel		  % of net
revenue		     Per
barrel		  % of net
revenue		          

Net revenue

 $959,934   $225.55    100.0%  $903,007   $220.08    100.0%  $56,927    6.3%  $5.47  

Cost of goods

  458,317    107.69    47.7%   437,996    106.75    48.5%   20,321    4.6%   0.94  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  501,617    117.86    52.3%   465,011    113.33    51.5%   36,606    7.9%   4.53  

Advertising, promotional and selling expenses

  273,629    64.29    28.5%   250,696    61.10    27.8%   22,933    9.1%   3.19  

General and administrative expenses

  71,556    16.81    7.5%   65,971    16.08    7.3%   5,585    8.5%   0.73  

Impairment (gain on sale) of assets, net

  258    0.06    0.0%   1,777    0.43    0.2%   (1,519)   -85.5%   (0.37) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

  345,443    81.17    36.0%   318,444    77.61    35.3%   26,999    8.5%   3.56  

Operating income

  156,174    36.70    16.3%   146,567    35.72    16.2%   9,607    6.6%   0.98  

Other expense, net

  (1,164)   (0.27)   -0.1%   (973)   (0.24)   -0.1%   (191)   19.6%   (0.03) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income before provision for income taxes

  155,010    36.42    16.1%   145,594    35.48    16.1%   9,416    6.5%   0.94  

Provision for income taxes

  56,596    13.30    5.9%   54,851    13.37    6.1%   1,745    3.2%   (0.07) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

 $98,414   $23.12    10.3%  $90,743   $22.12    10.0%  $7,671    8.5%  $1.00  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net revenue.Net revenue increased by $56.9 million, or 6.3%, to $959.9 million20.3% for the year ended December 26, 2015, as compared to $903.0 million for the year ended December 27, 2014, due primarily to increased shipments and increased revenue per barrel.

Volume.Total shipment volume of 4,256,000 barrels for the year ended December 26 2015 increased by 3.7% over comparable 2014 levels of 4,103,000 barrels, due primarilyto increases in shipments of Coney Island, Twisted Tea, Angry Orchard and Traveler brand products that were only partially offset by shipment declines in Samuel Adams brand products.

Depletions, or sales by Distributors to retailers, of the Company’s products for the year ended December 26, 2015 increased by approximately 4% compared to the prior year, primarily due to increases in depletions of Twisted Tea, Coney Island, Angry Orchard and Traveler brand products that were only partially offset by declines in depletions of Samuel Adams brand products.

Net Revenue per barrel. The net revenue per barrel increased by 2.5% to $225.55 per barrel for the year ended December 26, 2015, as compared to $220.08 per barrel for the year ended December 27, 2014, due primarily to price increases and changes in product and package mix.

Significant changes in the package mix could have a material effect on net revenue. The Company primarily packages its brands in kegs, bottles and cans. Assuming the same level of production, a shift in the mix from kegs to bottles and cans would effectively increase revenue per barrel, as the price per equivalent barrel is lower for kegs than for bottles and cans. The percentage of bottles and cans to total shipments increased by 1.7% to 78.7% of total shipments for the year ended December 26, 2015 as compared to the year ended December 27, 2014.

Gross profit.Gross profit was $117.86 per barrel for the year ended December 26, 2015, as compared to $113.33 per barrel for the year ended December 27, 2014. Gross margin was 52.3% for the year ended December 26, 2015, as compared to 51.5% for the year ended December 27, 2014. The increase in gross profit per barrel of $4.53 is primarily due to an increase in net revenue per barrel, partially offset by an increase in cost of goods sold per barrel.

Cost of goods sold was $107.69 per barrel for the year ended December 26, 2015, as compared to $106.75 per barrel for the year ended December 27, 2014. The 2015 increase in cost of goods sold of $0.94 per barrel is primarily due to product and package mix and higher brewery operating costs, partially offset by lower ingredient costs.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s 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 $22.9 million, or 9.1%, to $273.6 million for the year ended December 26, 2015, as compared to $250.7 million for the year ended December 27, 2014. The increase was primarily a result of increased media advertising of $14.6 million, increased costs for additional sales personnel and commissions of $5.5 million and increased point of sale and local marketing of $4.1 million.

Advertising, promotional and selling expenses were 28.5% of net revenue, or $64.29 per barrel, for the year ended December 26, 2015, as compared to 27.8% of net revenue, or $61.10 per barrel, for the year ended December 27, 2014. 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.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to between 2% and 4% of net sales. The Company may adjust its promotional efforts in the Distributors’ 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 $5.6 million, or 8.5%, to $71.6 million for the year ended December 26, 2015, as compared to $66.0 million for the comparable period in 2014. The29, 2018. This increase was primarily due to increasesthe favorable impact in salary and benefit expenses, consulting and facilities costs.

Impairment2018 of assets.For the year ended December 26, 2015, the Company incurred impairment charges of $0.3 million, based upon its review of the carrying values of its property, plant and equipment.

Stock-based compensation expense.For the year ended December 26, 2015, an aggregate of $6.7 million in stock-based compensation expense is included in advertising, promotional and selling expenses and general and administrative expenses. Stock compensation decreased by $0.2 million in 2015 compared to 2014, primarily due to performance not being achieved on certain awards granted during 2015.

Provision for income taxes.The Company’s effective tax rate for the year ended December 26, 2015 of 36.5% decreased from the year ended December 27, 2014rate of approximately 37.7%. This decrease was primarily the result of an increased federal manufacturing deduction and lower state tax rates.

accounting method changes.

Liquidity and Capital Resources

Cash decreased to $91.0$36.7 million as of December 31, 201628, 2019 from $94.2$108.4 million as of December 26, 2015,29, 2018, reflecting cash used in financing activitiesfor the Dogfish Head Brewery Transaction and for purchases of property, plant and equipment, that was only partially offset by cash provided by operating and financing activities.

Cash provided by or used in operating activities consists of net income, adjusted for certain
non-cash
items, such as depreciation and amortization, stock-based compensation expense and related excess tax benefit, other
non-cash
items included in operating results, and changes in operating assets and liabilities, such as accounts receivable, inventory, accounts payable and accrued expenses.

Cash provided by operating activities increased from $163.4 million in 2016 was $154.22018 to $178.2 million in 2019 principally as a result of increases in shipments and primarily consisted of netoperating income, of $87.3 million,non-cash items of $51.6 million and a net decreasepartially offset by higher investments in operating assets and liabilities of $15.3 million which includes a $12.0 million tax refund in the first quarter of 2016. Cash provided by operating activities in 2015 totaled $168.7 million and primarily consisted of net income of $98.4 million,non-cash items of $42.1 million and a net decrease in operating assets and liabilities of $28.2 million which includes a $17.2 million tax refund in the first quarter of 2015.

working capital, particularly higher inventory to support increased demand.

The Company used $46.0$258.8 million in investing activities during 2016,2019, as compared to $74.2$55.3 million during 2015. 2016 investing2018. Investing activities in 2019 primarily consisted of $165.5 million of investment in Dogfish Head, net of cash acquired, and capital investments of $49.9 million made mostly in the Company’s breweries to drive efficiencies and cost reductions, and support product innovation and future growth, partially offsetgrowth.
Cash provided by $3.9 million in proceeds from the sale of land in Freetown, Massachusetts in 2016.

Cash used in financing activities was $111.3$8.9 million during 2016,2019, as compared to $76.7$65.3 million used in financing activities during 2015.2018. The $34.7$74.2 million differenceincrease in cash provided by financing cash flowactivities in 20162019 from 20152018 is primarily due to an increasea decrease in stock repurchases under the Company’s Stock Repurchase Program and a decreasean increase in proceeds from the exercise of stock options and the related tax benefits.

options.

In 1998, the Board of Directors authorized management to implement a stock repurchase program. During the year ended December 31, 2016,28, 2019, the Company repurchased approximately 945,000did not repurchase any shares of its Class A Common Stock for an aggregate purchase price of $161.7 million.under the stock repurchase program. As of December 31, 2016,28, 2019, the Company had repurchased a cumulative total of approximately 12.513.8 million shares of its Class A Common Stock for an aggregate purchase price of $607.8$840.7 million.

From January 1, 2017December 29, 2019 through February 17, 2017,14, 2020, the Company repurchased approximately 116,000 additionaldid not repurchase any shares of its Class A Common Stock for an aggregate purchase price of $18.5 million. As of February 17, 2017, the Company has repurchased a cumulative total of approximately 12.6 million shares of its Class A Common Stock for an aggregate purchase price of $626.3 million.Stock. The Company has approximately $154.7$90.3 million remaining on the $781.0$931.0 million stock repurchase expenditure limit set by the Board of Directors.

The Company expects that its cash balance as of December 31, 201628, 2019 of $91.0$36.7 million, along with future operating cash flow and the Company’s unused line of credit of $150.0 million, will be sufficient to fund future cash requirements. The Company’s $150.0 million credit facility has a term not scheduled to expire until March 31, 2019.2023. As of the date of this filing, 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.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted
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accounting principles. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

Provision for Excess or Expired Inventory

Inventories are stated at the lower of cost, determined on afirst-in,first-out basis, or market value.

The Company enters into multi-year purchase commitments in order to secure adequate supply of ingredients and packaging, to brew and package its products. Inventory on hand and under purchase commitments totaled approximately $173.7 million at December 31, 2016. The Company’s provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand and under contract. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various ingredients. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provisions for excess or expired inventory are recorded as aincluded in cost of goods sold and have historically been adequate to provide for losses on its raw materials.inventory. Provision for excess or expired inventory included in cost of goods sold was $4.5$8.1 million, $4.0$4.2 million and $6.1$5.8 million in fiscal years 2016, 2015,2019, 2018 and 2014,2017, respectively.

Valuation of Long-Lived Assets

The Company’s long-lived assets include property, plantProperty, Plant and equipment which are depreciated over their estimated useful lives. Equipment

The carrying value of property, plant and equipment, net of accumulated depreciation, at December 31, 201628, 2019 was $408.4$430.6 million. For purposes of determining whether there are any impairment losses, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. For all long-lived assets, ifIf an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of potential impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, and the remaining useful life of the asset. Impairment of assets included in operating expenses was $0.9 million, $0.7 million $0.3 million, and $1.8$2.5 million in fiscal years 2016, 2015,2019, 2018 and 2014,2017, respectively.

Factors generally considered important which could trigger an impairment review on the carrying value of long-lived assets include the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner of use of acquired assets or the strategy for the Company’s overall business; (3) underutilization of assets; and (4) discontinuance of products by the Company or its customers. The Company believes that the carrying value of its long-lived assets was realizable as of December 28, 2019 and December 29, 2018.
Valuation of Goodwill and Indefinite Lived Intangible Assets
The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be 
impaired. The Company performs its annual impairment tests and
 re-evaluates
the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.
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The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit, of which the Company has one, is less than its carrying amount or to proceed directly to performing a quantitative impairment test.
Under the quantitative assessment, the estimated fair value of the Company’s reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the Company’s reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the Company’s market capitalization and enterprise value. If the estimated fair value of the Company’s reporting unit is less than the carrying value of its reporting unit, a goodwill impairment will be recognized. The amount of impairment charge for goodwill is equal to the excess of the carrying value of the goodwill over the implied fair value of the goodwill. In estimating the fair value of the Company’s reporting unit, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, cost of capital, and other factors. The assumptions used in the estimate of fair value are based on historical trends and the projections and assumptions that are used in current strategic operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for these assets. The recognition of any resulting impairment loss could have a material adverse impact on the Company’s financial statements.
The Company’s other intangible assets consist primarily of customer relationships and a trademark obtained through the Company’s Dogfish Head acquisition. Customer relationships are amortized over their estimated useful lives. The trademark which was determined to have an indefinite useful life is not amortized. The guidance for indefinite lived intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. Under the quantitative assessment, the trademark is evaluated for impairment by comparing the carrying value of the trademark to its estimated fair value. The estimated fair value of the trademark is calculated based on an income approach using the relief from royalty method. The estimate of fair value is then compared to the carrying value the trademark. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value
In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, and other factors. The assumptions used in the estimate of fair value are consistent with historical trends and the projections and assumptions that are used in current strategic operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for these assets. The recognition of any resulting impairment loss could have a material adverse impact on the Company’s financial statements.
Business Combinations
On July 3, 2019, the Company completed its acquisition of Dogfish Head Brewery and various related operations (the “Transaction”), through the acquisition of all of the equity interests held by certain private entities in
 Off-Centered
Way LLC, the parent holding company of the Dogfish Head Brewery operations. Dogfish Head results of operations have been included in the Company’s financial results beginning after the closing date of July 3, 2019. Under the acquisition method of accounting, the Company allocated the fair value of purchase consideration transferred to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess purchase

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consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, the Company makes significant estimates and assumptions, especially with respect to intangible assets. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. The fair value of the assets acquired and liabilities assumed is typically determined by using either estimates of replacement costs or discounted cash flow valuation methods. When determining the fair value of tangible assets acquired, the Company must estimate the cost to replace the asset with a new asset taking into consideration such factors as age, condition and the economic useful life of the asset. When determining the fair value of intangible assets acquired, the Company must estimate the applicable discount rate, the royalty rate, and the timing and amount of future expected cash flows. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
Revenue Recognition

Net revenue includes product sales, less customer programs and incentives, reserves for stale beer returnsClassification of Customer Programs and excise taxes. Incentives

The Company recognizes revenue on product sales atwhen obligations under the time whenterms of a contract with its customer are satisfied; generally, this occurs with the producttransfer of control of its products. Revenue is shipped andmeasured as the following conditions are met: persuasive evidenceamount of an arrangement exists, title has passedconsideration expected to the customer according to the shipping terms, the price is fixed and determinable, and collection of the sales proceeds is reasonably assured.be received in exchange for transferring products. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met.

As of December 28, 2019 and December 29, 2018, the Company has deferred $7.0 million and $4.6 million, respectively in revenue related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of the product in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys stale beer that is returned by Distributors. Where legal, theThe Company generally credits approximately fifty percent of the Distributor’sdistributor’s cost of the beer that has passed its expiration date for freshness when it is returned to the Company or destroyed. The Company reduces revenue and establishes a reservean accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue. Historically, the cost of actual stale beer returns has been in line with established reserves, however, the cost could differ materially from the estimated reserve which would impact revenue. As of December 31, 201628, 2019 and December 26, 2015,29, 2018, the stale beer reserve was $5.2$1.8 million and $3.3$2.1 million, respectively.

Customer Programs and Incentives

Customer programs and incentives which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses, in accordance with ASC Topic605-50,Revenue Recognition- Customer Payments and Incentives,based on the nature of the expenditure. Customer incentives and other payments made to Distributors are primarily based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $54.4$75.2 million, $55.3$55.5 million and $52.4$51.8 million in fiscal year 2016, 2015,2019, 2018 and 2014,2017, respectively.

Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

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Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2016, 2015,2019, 2018 and 20142017 were $33.2$43.9 million, $33.2$34.5 million and $28.5$30.2 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. The agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.

Customer incentives and other payments are made primarily to Distributors based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2016, 2015,2019, 2018 and 20142017 were $21.2$31.2 million, $22.1$21.0 million and $23.9$21.6 million, respectively. In fiscal 2016, 2015,2019, 2018 and 2014,2017, the Company recorded certain of these costs in the total amount of $16.1$21.6 million, $16.6$13.9 million, and $18.7$15.3 million, respectively, as reductions to net revenue. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

In connection with its preparation of financial statements and other financial reporting, management is required to make certain estimates and assumptions regarding the amount, timing and timingclassification of expenditures resulting from these activities. Actual expenditures incurred could differ from management’s estimates and assumptions.

Kegs and Pallets Inventory and Refundable Deposits

The Company distributes its draft beer in kegs and packaged beer primarily in glass bottles and cans and such kegs, bottles and cans are shipped on pallets to Distributors. Most kegs and pallets are owned by the Company. Upon shipment of beer to Distributors, the Company collects a refundable deposit on the kegs and pallets. As of December 31, 2016 and December 26, 2015, deposits held by the Company totaled $15.8 million and $18.9 million, respectively. The Company has experienced some loss of kegs and pallets and anticipates that some loss will occur in future periods. The Company believes that the loss of kegs and pallets, after considering the forfeiture of related deposits, has not been material to the financial statements. The Company uses internal records, records maintained by Distributors, records maintained by other third party vendors and historical information to estimate the physical count of kegs and pallets held by Distributors. These estimates affect the amount recorded as property, plant and equipment and current liabilities as of the date of the financial statements. The actual liability for refundable deposits could differ from these estimates.

Stock-Based Compensation

The Company accounts for stock-based compensationshare-based awards in accordance with the fair value recognition provisions of Accounting Standards CodificationASC Topic 718,Compensation —– Stock Compensation.Stock-based (“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures. Stock-based compensation was $6.2$12.3 million, $6.7$10.0 million and $6.9$6.3 million in fiscal years 2016, 2015,2019, 2018 and 2014,2017, respectively. Various
As permitted by ASC 718, the Company elected to use a lattice model, such as the trinomial option-pricing models are usedmodel, to calculateestimate the fair valuevalues of options.stock options.. All option-pricing models require the input of subjective assumptions. These assumptions include the estimated volatility of the Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and expected exercise behavior.

See Note L of the Notes to Consolidated Financial Statements for further discussion of the application of the option-pricing models.

In addition, an estimated
pre-vesting
forfeiture rate is applied in the recognition of the compensation charge. Periodically, the Company grants performance-based stock options, related to which it only recognizes compensation expense if it is probable that performance targets will be met. Consequently, at the end of each reporting period, the Company estimates whether it is probable that performance targets will be met. Changes in the subjective assumptions and estimates can materially affect the amount of stock-based compensation expense recognized in the consolidated statements of comprehensive income.

Income Taxes

Income tax expense was $49.8 million, $56.6 million, and $54.9 million in fiscal years 2016, 2015, and 2014, respectively. The Company provides for deferred taxes using an asset and liability approach that requires the recognition


Table of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. This results in differences between the book and tax basis of the Company’s assets, liabilities and carry-forwards such as tax credits. In estimating future tax consequences, all expected future events, other than enactment of changes in the tax laws or rates, are generally considered. Valuation allowances are provided to the extent deemed necessary when realization of deferred tax assets appears unlikely.

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company records estimated reserves for exposures associated with positions that it takes on its income tax returns. Historically, the valuation allowances and reserves for uncertain tax positions have been adequate to cover the related tax exposures.

Contents

Business Environment

The alcoholic beverage industry is highly regulated at the federal, state and local levels. The Alcohol and Tobacco Tax and Trade Bureau (“TTB”)TTB and the Justice Department’s Bureau of Alcohol, Tobacco, Firearms and Explosives enforce laws under the Federal Alcohol Administration Act. The TTB is responsible for administering and enforcing excise tax laws that directly affect the Company’s results of operations. State and regulatory authorities have the ability to suspend or revoke the Company’s licenses and permits or impose substantial fines for violations. The Company has established strict policies, procedures and guidelines in efforts to ensure compliance with all applicable state and federal laws. However, the loss or revocation of any existing license or permit could have a material adverse effect on the Company’s business, results of operations, cash flows and financial position.

The Better BeerHigh End category within the United States is highly competitive due to the large number of regional craftdomestic and specialtyinternational brewers and the increasing number of craft brewers of imported beersin this category who distribute similar products that have similar pricing and target drinkers. The Company believes that its pricing is appropriate given the quality and reputation of its core brands, while realizing that economic pricing pressures may affect future pricing levels. Certain majorLarge domestic brewers have also developed brands to compete within the Better Beer, FMB and hard cider categories and have acquired

interests in craft beers and hard cider makers, or importation rights to foreign brands. Import brewers and major domesticinternational brewers are able to compete more aggressively than the Company, as they have substantially greater resources, marketing strength and distribution networks than the Company. The Company anticipates craft beer competition increasing asamong domestic craft brewers have benefited from eleven yearswill remain strong, as the number of healthy growth and are lookingcraft brewers continues to maintain these trends.grow. The Company also increasingly competes with wine and spirits companies, some of which have significantly greater resources than the Company. This competitive environment may affect the Company’s overall performance within the Better BeerHigh End category. As the market matures and the Better BeerHigh End category continues to consolidate, the Company believes that companies that are well-positioned in terms of brand equity, marketing and distribution will have greater success than those who do not. With approximately 350its over 400 Distributors nationwide and the Company’s sales force of approximately 415426 people, as well as a commitment to maintaining its innovation capability, brand equity and the quality, of its beer, the Company believes it is well positioned to compete in the BetterHigh End Beer market.

The demand for the Company’s products is also subject to changes in drinkers’ tastes.

category.

The Potential Impact of Known Facts, Commitments, Events and Uncertainties

Hops Purchase Commitments

The Company utilizes several varieties of hops in the production of its products. To ensure adequate supplies of these varieties, the Company enters into advance multi-year purchase commitments based on forecasted future hop requirements, among other factors.

During 2016, the Company entered into several hops future contracts in the normal course of business. The total value

Contractual Obligations
See Note J of the contracts entered into as of December 31, 2016, which are denominated in U.S. Dollars, Euros and New Zealand Dollars, was $56.3 million. The Company has no forward exchange contracts in place as of December 31, 2016 and currently intendsNotes to purchase future hops using the exchange rate at the time of purchase. These contracts were deemed necessary in order to bring hop inventory levels and purchase commitments into balance with the Company’s current brewing volume and hop usage forecasts. In addition, these contracts enable the Company to secure its position for future supply with hop vendors in the face of some competitive buying activity.

The Company’s accounting policy for hop inventory and purchase commitments is to recognize a loss by establishing a reserve for aged hops and to the extent inventory levels and commitments exceed forecasted needs. The computation of the excess inventory requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. Actual results may differ materially from management’s estimates. The Company continues to manage inventory levels and purchase commitments in an effort to maximize utilization of hops on hand and hops under commitment. However, changes in management’s assumptions regarding future sales growth, product mix and hops market conditions could result in future material losses.

Contractual Obligations

The following table presents contractual obligations as of December 31, 2016:

   Payments Due by Period 
   Total   2017   2018-2019   2020-2021   Thereafter 
   (in thousands) 

Hops, barley and wheat

  $71,128    $27,784    $29,244    $9,361    $4,739  

Advertising

   27,430     26,825     605     —       —    

Apples and other ingredients

   27,225     27,225     —       —       —    

Glass bottles

   16,551     16,551     —       —       —    

Operating leases

   15,900     3,343     5,648     5,194     1,715  

Equipment and machinery

   10,700     10,700     —       —       —    

Other

   4,505     2,624     1,881     —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $173,439    $115,052    $37,378    $14,555    $6,454  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company had outstanding totalnon-cancelable contractual obligations of $173.4 million at December 31, 2016. These obligations are made up of hops, barley and wheat of $71.1 million, advertising contracts of $27.4 million, apples and other ingredients of $27.2 million, glass bottles of $16.6 million, operating leases of $15.9 million, equipment and machinery of $10.7 million and other commitments of $4.5 million.

The Company has entered into contracts for the supply of a portion of its hops requirements. These purchase contracts extend through crop year 2022 and specify both the quantities and prices, denominated in U.S. Dollars, Euros and New Zealand Dollars to which the Company is committed. Hops purchase commitments outstanding at December 31, 2016 totaled $56.3 million, based on the exchange rates on that date.

Currently, the Company has entered into contracts for barley and wheat with two major suppliers. The contracts include crop years 2016 and 2017 and cover the Company’s barley, wheat, and malt requirements for 2017 and part of 2018. These purchase commitments outstanding at December 31, 2016 totaled $14.8 million.

The Company sources glass bottles pursuant to a Glass Bottle Supply Agreement with Anchor Glass Container Corporation (“Anchor”), under which Anchor is the supplier of certain glass bottles for the Company’s Cincinnati Brewery and its Pennsylvania Brewery. This agreement also establishes the terms on which Anchor may supply glass bottles to other breweries where the Company brews its beers. Under the agreement with Anchor, the Company has minimum and maximum purchase commitments that are based on Company-provided production estimates which, under normal business conditions, are expected to be fulfilled. Minimum purchase commitments under this agreement, assuming the supplier is unable to replace lost production capacity cancelled by the Company, as of December 31, 2016 totaled $16.6 million.

The Company has various operating lease agreements in place for facilities and equipment as of December 31, 2016. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2022.

For the fiscal year ended December 31, 2016, the Company brewed most all of its volume at Company-owned breweries. In the normal course of its business, the Company has historically entered into various production arrangements with other brewing companies. Pursuant to these arrangements, the Company purchases the liquid produced by those brewing companies, including the raw materials that are used in the liquid, at the time such liquid goes into fermentation. The Company is required to repurchase all unused raw materials purchased by the brewing company specifically for the Company’s beers at the brewing company’s cost upon termination of the production arrangement. The Company is also obligated to meet annual volume requirements in conjunction with certain production arrangements, which are not material to the Company’s operations.

The Company’s arrangements with other brewing companies require it to periodically purchase equipment in support of brewery operations. As of December 31, 2016, there were no significant equipment purchase requirements outstanding under existing contracts. Changes to the Company’s brewing strategy or existing production arrangements, new production relationships or the introduction of new products in the future may require the Company to purchase equipment to support the contract breweries’ operations.

Consolidated Financial Statements.

Recent Accounting Pronouncements

See Note B of the Notes to Consolidated Financial Statements.

Off-Balance
Sheet Arrangements

The Company has not entered into any material
off-balance
sheet arrangements as of December 31, 2016.

28, 2019.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of business, the Company is exposed to the impact of fluctuations in foreign exchange rates. The Company does not enter into derivatives or other market risk sensitive instruments for the purpose of speculation or for trading purposes. Market risk sensitive instruments include derivative financial instruments, other financial instruments and derivative commodity instruments, such as futures, forwards, swaps and options, that are exposed to rate or price changes.

The Company enters into hops purchase contracts, as described above under “Hops Purchase Commitments”,in Note J of the Notes to Consolidated Financial Statements, and makes purchases of other ingredients, equipment and machinery denominated in foreign currencies. The cost of these commitments changechanges as foreign exchange rates fluctuate. Currently, it is not the Company’s policy to hedge against foreign currency fluctuations.


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The interest rate for borrowings under the Company’s credit facility is based on either (i) the Alternative Prime Rate (3.75%(4.75% at December 31, 2016)28, 2019) or (ii) the applicable LIBOR rate (0.72%(1.75% at December 31, 2016)28, 2019) plus 0.45%, and therefore, subjects the Company to fluctuations in such rates. As of December 31, 2016,28, 2019, the Company had no amounts outstanding under its current line of credit.

Sensitivity Analysis

The Company applies a sensitivity analysis to reflect the impact of a 10% hypothetical adverse change in the foreign currency rates. A potential adverse fluctuation in foreign currency exchange rates could negatively impact future cash flows by approximately $4.0$3.8 million as of December 31, 2016.

28, 2019.

There are many economic factors that can affect volatility in foreign exchange rates. As such factors cannot be predicted, the actual impact on earnings due to an adverse change in the respective rates could vary substantially from the amounts calculated above.

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Item 8.Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors and Stockholders of

The Boston Beer Company, Inc.

Boston, Massachusetts

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Boston Beer Company, Inc. and subsidiaries (the “Company”) as of December 31, 201628, 2019 and December 26, 2015,29, 2018 and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows, for each of the twothree fiscal years in the period ended December 31, 2016. 28, 2019, and the related notes. In our opinion, the financial statements present fairly, in all material respects, the financial position of The Boston Beer Company, Inc. and subsidiaries as of December 28, 2019 and December 29, 2018 and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in
Internal Control — Integrated Framework (2013)
 issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note B to the financial statements, effective December 30, 2018, the Company adopted FASB Accounting Standards Update
2016-02,
Leases (Topic 842)
, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements present fairly, in allthat was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material respects,to the financial positionstatements and (2) involved our especially challenging, subjective, or complex judgments. The communication of The Boston Beer Company, Inc. and subsidiaries ascritical audit matters does not alter in any way our
40
Table of December 31, 2016 and December 26, 2015, and the results of their operations and their cash flows for each of the two fiscal years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2017 expressed an unqualified Contents

opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 22, 2017

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of The Boston Beer Company, Inc.

We have audited the accompanying consolidated statements of comprehensive income, stockholders’ equity and cash flows of The Boston Beer Company, Inc. for the year ended December 27, 2014. These financial statements, taken as a whole, and we are not, by communicating the responsibility of the Company’s management. Our responsibility is to express ancritical audit matter below, providing a separate opinion on these financial statements basedthe critical audit matter or on our audit.

We conducted our audit in accordance with the standardsaccounts or disclosures to which it relates.

Acquisition of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditDogfish Head Brewery — Refer to obtain reasonable assurance about whetherNote C to the financial statements are free
Critical Audit Matter Description
The Company completed the acquisition of material misstatement. An audit includes examining,Dogfish Head Brewery for total consideration of $336 million on July 3, 2019. The Company accounted for this transaction under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated, on a testpreliminary basis, evidence supportingto the amountsassets acquired and disclosuresliabilities assumed based on their respective fair values, including identified intangible assets of $102.3 million and resulting goodwill of $108.8 million. Of the identified intangible assets acquired, the most significant is a brand indefinite lived intangible asset of $98.5 million (the “Dogfish Head brand trade name”). The Company estimated the fair value of the Dogfish Head brand trade name using the relief-from-royalty method, which is a specific application of the discounted-cash-flow-method that required management to make significant estimates and assumptions related to forecasts of revenue growth projections, including growth rates for a
10-year
time period, royalty rates, discount rates, and methodologies utilized in the financial statements. Anvaluation models.
We identified the Dogfish Head brand trade name for Dogfish Head Brewery as a critical audit also includes assessingmatter because of the accounting principles used and significant estimates and assumptions management made by management,to fair value this asset for purposes of recording the acquisition. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures, including the need to involve fair value specialists, to evaluate the reasonableness of management’s forecasts of future revenue, specifically the long-term growth rate, as well as evaluating the overall financial statement presentation. We believe that ourselection of the royalty rates, discount rates and methodologies utilized in the valuation models.
How the Critical Audit Matter Was Addressed in the Audit
Our audit provides a reasonable basis for our opinion.

In our opinion,procedures related to forecasts of revenue growth projections, the financial statements referred to above present fairly,selection of the royalty rates, discount rates, as well as the methodologies utilized in all material respects, the consolidated results of operations and cash flows of The Boston Beer Company, Inc.valuation models for the year ended December 27, 2014,Dogfish Head brand trade name included the following, among others:

We tested the effectiveness of controls over the valuation of the Dogfish Head brand trade name, including management’s controls over forecasts of revenue growth projections, the selection of the royalty rates, discount rates, as well as the methodologies utilized in conformity with U.S. generally accepted accounting principles.

the valuation models.
We evaluated the reasonableness of management’s forecast of revenue growth projections by comparing the projections to historical results and calculating independent revenue projections based on objectively verifiable evidence.
With the assistance of fair value specialists, we evaluated the reasonableness of the revenue growth projections, royalty rates, discount rates, and valuation methodologies by:
Testing the source information underlying the determination of revenue growth projections, specifically the long-term growth rate, royalty rates, and discount rates, and testing the mathematical accuracy of the calculations.
Developing a range of independent estimates for the discount rate and comparing those to the discount rate selected by management.

/s/ ErnstDeloitte & YoungTouche LLP

Boston, Massachusetts

February 24, 2015

19, 2020

We have served as the Company’s auditor since 2015.
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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share data)

   December 31,
2016		  December 26,
2015		 
Assets   

Current Assets:

   

Cash and cash equivalents

  $91,035   $94,193  

Accounts receivable, net of allowance for doubtful accounts of $0 and $244 as of December 31, 2016 and December 26, 2015, respectively

   36,694    38,984  

Inventories

   52,499    56,462  

Prepaid expenses and other current assets

   8,731    12,053  

Income tax receivable

   4,928    14,928  

Deferred income taxes

   7,351    6,983  
  

 

 

  

 

 

 

Total current assets

   201,238    223,603  

Property, plant and equipment, net

   408,411    409,926  

Other assets

   9,965    8,188  

Goodwill

   3,683    3,683  
  

 

 

  

 

 

 

Total assets

  $623,297   $645,400  
  

 

 

  

 

 

 
Liabilities and Stockholders’ Equity   

Current Liabilities:

   

Accounts payable

  $40,585   $42,718  

Current portion of debt and capital lease obligations

   60    58  

Accrued expenses and other current liabilities

   60,874    68,384  
  

 

 

  

 

 

 

Total current liabilities

   101,519    111,160  

Deferred income taxes

   64,612    56,001  

Debt and capital lease obligations, less current portion

   411    471  

Other liabilities

   10,173    16,547  
  

 

 

  

 

 

 

Total liabilities

   176,715    184,179  

Commitments and Contingencies (See Note J)

   

Stockholders’ Equity:

   

Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,170,956 and 9,389,005 shares issued and outstanding as of December 31, 2016 and December 26, 2015, respectively

   92    94  

Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 3,197,355 and 3,367,355 shares issued and outstanding as of December 31, 2016 and December 26, 2015, respectively

   32    34  

Additionalpaid-in capital

   349,913    290,096  

Accumulated other comprehensive loss, net of tax

   (1,103)   (951) 

Retained earnings

   97,648    171,948  
  

 

 

  

 

 

 

Total stockholders’ equity

   446,582    461,221  
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $623,297   $645,400  
  

 

 

  

 

 

 

             
 
Year Ended
 
 
December 28,
  
December 29,
  
December 30,
 
 
2019
  
2018
  
2017
 
Revenue
 $
  1,329,108
  $
  1,057,495
  $
  921,736
 
Less excise taxes
  
79,284
   
61,846
   
58,744
 
             
Net revenue
  
1,249,824
   
995,649
   
862,992
 
Cost of goods sold
  
635,658
   
483,406
   
413,091
 
             
Gross profit
  
614,166
   
512,243
   
449,901
 
Operating expenses:
         
Advertising, promotional and selling expenses
  
355,613
   
304,853
   
258,649
 
General and administrative expenses
  
112,730
   
90,857
   
73,126
 
Impairment of assets
  
911
   
652
   
2,451
 
             
Total operating expenses
  
469,254
   
396,362
   
334,226
 
             
Operating income
  
144,912
   
115,881
   
115,675
 
Other
(expense)
 
income, net:
         
Interest income
  
647
   
1,292
   
549
 
Other expense, net
  
(1,189
)  
(887
)  
(82
)
             
Total other
(expense)
 
income, net
  
(542
)  
405
   
467
 
             
Income before provision for income tax
  
144,370
   
116,286
   
116,142
 
Provision for income taxes
  
34,329
   
23,623
   
17,093
 
             
Net income
 $
110,041
  $
92,663
  $
99,049
 
             
Net income per common share
-
 basic
 $
9.26
  $
7.90
  $
8.18
 
             
Net income per common share
-
diluted
 $
9.16
  $
7.82
  $
8.09
 
             
Weighted-average number of common shares
-
Class A basic
  
8,908
   
8,620
   
8,933
 
             
Weighted-average number of common shares
-
Class B basic
  
2,873
   
3,002
   
3,102
 
             
Weighted-average number of common shares
-
diluted
  
11,908
   
11,734
   
12,180
 
             
Net income
 $
110,041
  $
92,663
  $
99,049
 
             
Other comprehensive
(loss)
 
income, net of tax:
         
Currency translation adjustment
  
47
   
25
   
17
 
Defined benefit plans liability adjustment
  
(519
)   
277
   
(202
)
Impact of ASU
2018-02
  
—  
   
(211
)  
—  
 
             
Total other comprehensive
(loss)
 
income, net of tax:
  
(472
)   
91
   
(185
)
             
Comprehensive income
 $
109,569
  $
92,754
  $
98,864
 
             
The accompanying notes are an integral part of these consolidated financial statements.

4
2
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

BALANCE SHEETS

(in thousands, except per share data)

   Year Ended 
   December 31,  December 26,  December 27, 
   2016 (53 weeks)  2015  2014 

Revenue

  $968,994  $1,024,040  $966,478 

Less excise taxes

   62,548   64,106   63,471 
  

 

 

  

 

 

  

 

 

 

Net revenue

   906,446   959,934   903,007 

Cost of goods sold

   446,776   458,317   437,996 
  

 

 

  

 

 

  

 

 

 

Gross profit

   459,670   501,617   465,011 

Operating expenses:

    

Advertising, promotional and selling expenses

   244,213   273,629   250,696 

General and administrative expenses

   78,033   71,556   65,971 

Impairment (gain on sale) of assets, net

   (235)   258   1,777 
  

 

 

  

 

 

  

 

 

 

Total operating expenses

   322,011   345,443   318,444 
  

 

 

  

 

 

  

 

 

 

Operating income

   137,659   156,174   146,567 

Other income (expense), net:

    

Interest income

   168   56   21 

Other expense, net

   (706)   (1,220)   (994) 
  

 

 

  

 

 

  

 

 

 

Total other income (expense), net

   (538)   (1,164)   (973) 
  

 

 

  

 

 

  

 

 

 

Income before provision for income tax

   137,121   155,010   145,594 

Provision for income taxes

   49,772   56,596   54,851 
  

 

 

  

 

 

  

 

 

 

Net income

  $87,349  $98,414  $90,743 
  

 

 

  

 

 

  

 

 

 

Net income per common share — basic

  $6.93  $7.46  $6.96 
  

 

 

  

 

 

  

 

 

 

Net income per common share — diluted

  $6.79  $7.25  $6.69 
  

 

 

  

 

 

  

 

 

 

Weighted-average number of common shares — Class A basic

   9,189   9,619   9,202 
  

 

 

  

 

 

  

 

 

 

Weighted-average number of common shares — Class B basic

   3,344   3,504   3,766 
  

 

 

  

 

 

  

 

 

 

Weighted-average number of common shares — diluted

   12,796   13,520   13,484 
  

 

 

  

 

 

  

 

 

 

Net income

  $87,349  $98,414  $90,743 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss), net of tax:

    

Currency translation adjustment

   (99)   (22)   —   

Defined benefit plans liability adjustment

   (53)   204   (716) 
  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss), net of tax:

   (152)   182   (716) 
  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $87,197  $98,596  $90,027 
  

 

 

  

 

 

  

 

 

 

 
December 28,
  
December 29,
 
 
2019
  
2018
 
Assets
    
Current Assets:
      
Cash and cash equivalents
 $
36,670
  $
108,399
 
Accounts receivable
  
54,404
   
34,073
 
Inventories
  
106,038
   
70,249
 
Prepaid expenses and other current assets
  
12,077
   
13,136
 
Income tax receivable
  
9,459
   
5,714
 
         
Total current assets
  
218,648
   
231,571
 
Property, plant and equipment, net
  
541,068
   
389,789
 
Operating
right-of-use
assets
  
53,758
   
—  
 
Goodwill
  
112,529
   
3,683
 
Intangible assets
  
104,272
   
2,099
 
Other assets
  
23,782
   
12,709
 
         
Total assets
 $
  1,054,057
  $
  639,851
 
         
Liabilities and Stockholders’ Equity
    
Current Liabilities:
      
Accounts payable
 $
76,374
  $
47,102
 
Accrued expenses and other current liabilities
  
99,107
   
73,412
 
Current operating lease liabilities
  
5,168
   
—  
 
         
Total current liabilities
  
180,649
   
120,514
 
Deferred income taxes
  
75,010
   
49,169
 
Non-current
operating lease liabilities
  
53,940
   
—  
 
Other liabilities
  
8,822
   
9,851
 
         
Total liabilities
  
318,421
   
179,534
 
Commitments and Contingencies
      
Stockholders’ Equity:
      
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,370,526 and 8,580,593 shares issued
and outstanding as of December 28, 2019 and December 29, 2018, respectively
  
94
   
86
 
Class
 
B Common Stock, $.01 par value; 4,200,000 shares authorized;
 
2,672,983
 
and
 
2,917,983
 
shares
 
issued
and
 
outstanding
 
as of December
 
28, 2019 and December
 
29
, 201
8
,
 
respectively
  
27
   
29
 
Additional
paid-in
capital
  
571,784
   
405,711
 
Accumulated other comprehensive loss, net of tax
  
(1,669
)  
(1,197
)
Retained earnings
  
165,400
   
55,688
 
         
Total stockholders’ equity
  
735,636
   
460,317
 
         
Total liabilities and stockholders’ equity
 $
1,054,057
  $
639,851
 
         
The accompanying notes are an integral part of these consolidated financial statements.

4
3
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2016,28, 2019, December 26, 201529, 2018, and December 27, 2014

30, 2017

(in thousands)

  Class A
Common
Shares		  Class A
Common
Stock,
Par		  Class B
Common
Shares		  Class B
Common
Stock,
Par		  Additional
Paid-in
Capital		  Accumulated
Other
Comprehensive
(Loss) Income,
net of tax		  Retained
Earnings		  Total
Stockholders’
Equity		 

Balance at December 28, 2013

  8,785   $88    3,962   $40   $173,025   $(417)  $129,349   $302,085  

Net income

        90,743    90,743  

Stock options exercised and restricted shares activities, including tax benefit of $17,353

  351    3      45,027      45,030  

Stock-based compensation expense

      6,857      6,857  

Repurchase of Class A Common Stock

  (29)        (7,859)   (7,859) 

Conversion from Class B to Class A

  345    4    (345)   (4)      —    

Defined benefit plans liability adjustment, net of tax of $455

       (716)    (716) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 27, 2014

  9,452    95    3,617    36    224,909    (1,133)   212,233    436,140  

Net income

        98,414    98,414  

Stock options exercised and restricted shares activities, including tax benefit of $15,350

  303    3      58,522      58,525  

Stock-based compensation expense

      6,665      6,665  

Repurchase of Class A Common Stock

  (616)   (6)       (138,699)   (138,705) 

Conversion from Class B to Class A

  250    2    (250)   (2)      —    

Defined benefit plans liability adjustment, net of tax of ($142)

       204     204  

Currency translation adjustment

       (22)    (22) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 26, 2015

  9,389    94    3,367    34    290,096    (951)   171,948    461,221  

Net income

        87,349    87,349  

Stock options exercised and restricted shares activities, including tax benefit of $12,524

  557    5      53,669      53,674  

Stock-based compensation expense

      6,148      6,148  

Repurchase of Class A Common Stock

  (945)   (9)       (161,649)   (161,658) 

Conversion from Class B to Class A

  170    2    (170)   (2)      —    

Defined benefit plans liability adjustment, net of tax of $32

       (53)    (53) 

Currency translation adjustment

       (99)    (99) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2016

  9,171   $92    3,197   $32   $349,913   $(1,103)  $97,648   $446,582  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                 
 
Class A
Common
Shares
 
 
Class A
Common
Stock,
Par
 
 
Class B
Common
Shares
 
 
Class B
Common
Stock,
 
Par
 
 
Additional
Paid-in

Capital
 
 
Accumulated
Other
Comprehensive
Loss, net of tax
 
 
Retained
Earnings
 
 
Total
Stockholders’
Equity
 
Balance at December 31, 2016
 
 
9,171
 
 
 
92
 
 
 
3,197
 
 
 
32
 
 
 
349,913
 
 
 
(1,103
)
 
 
97,648
 
 
 
446,582
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
99,049
 
 
 
99,049
 
Stock options exercised and restricted shares activities
 
 
217
 
 
 
2
 
 
 
 
 
 
 
 
 
16,361
 
 
 
 
 
 
 
 
 
16,363
 
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,316
 
 
 
 
 
 
 
 
 
6,316
 
Repurchase of Class A Common Stock
 
 
(964
)
 
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(144,592
)
 
 
(144,602
)
Conversion from Class B to Class A
 
 
179
 
 
 
2
 
 
 
(179
)
 
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
—  
 
Defined benefit plans liability adjustment, net of tax of $68
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(202
)
 
 
 
 
 
(202
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
 
 
 
 
 
 
17
 
                                 
Balance at December 30, 2017
 
 
8,603
 
 
$
86
 
 
 
3,018
 
 
$
30
 
 
$
372,590
 
 
$
(1,288
)
 
$
52,105
 
 
$
423,523
 
                                 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
92,663
 
 
 
92,663
 
Stock options exercised and restricted shares activities
 
 
227
 
 
 
2
 
 
 
 
 
 
 
 
 
23,086
 
 
 
 
 
 
 
 
 
23,088
 
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10,035
 
 
 
 
 
 
 
 
 
10,035
 
Repurchase of Class A Common Stock
 
 
(350
)
 
 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(88,309
)
 
 
(88,312
)
Conversion from Class B to Class A
 
 
100
 
 
 
1
 
 
 
(100
)
 
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
—  
 
Defined benefit plans liability adjustment, net of tax of $93
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
277
 
 
 
 
 
 
277
 
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
25
 
 
 
 
 
 
25
 
One time effect of adoption of ASU
2014-09,
Revenue from Contracts with Customers, net of tax of $329
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(982
)
 
 
(982
)
One time effect of adoption of ASU
2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(211
)
 
 
211
 
 
 
—  
 
                                 
Balance at December 29, 2018
 
 
8,580
 
 
$
86
 
 
 
2,918
 
 
$
29
 
 
$
405,711
 
 
$
(1,197
)
 
$
55,688
 
 
$
460,317
 
                                 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
110,041
 
 
 
110,041
 
Stock options exercised and restricted shares activities
 
 
116
 
 
 
1
 
 
 
 
 
 
 
 
 
8,998
 
 
 
 
 
 
 
 
 
8,999
 
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12,337
 
 
 
 
 
 
 
 
 
12,337
 
Shares issued in connection with Dogfish Head merger
 
 
430
 
 
 
5
 
 
 
 
 
 
 
 
 
144,738
 
 
 
 
 
 
 
 
 
144,743
 
Repurchase of Class A Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—  
 
Conversion from Class B to Class A
 
 
245
 
 
 
2
 
 
 
(245
)
 
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
—  
 
Defined benefit plans liability adjustment, net of tax of $176
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(519
)
 
 
 
 
 
(519
)
Adoption of ASU
2014-09,
Revenue from Contracts with Customers, tax adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(329
)
 
 
(329
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
47
 
 
 
 
 
 
47
 
                                 
Balance at December 28, 2019
 
 
9,371
 
 
$
94
 
 
 
2,673
 
 
$
  27
 
 
$
  571,784
 
 
$
(1,669
)
 
$
165,400
 
 
$
735,636
 
                                 
The accompanying notes are an integral part of these consolidated financial statements.

4
4
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   Year Ended 
   December 31,  December 26,  December 27, 
   2016 (53 weeks)  2015  2014 

Cash flows provided by operating activities:

    

Net income

  $87,349  $98,414  $90,743 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

   49,557   42,885   35,138 

Impairment of assets

   716   258   1,777 

Loss on disposal of property, plant and equipment

   616   515   434 

Gain on sale of property, plant and equipment

   (951)   —     —   

Bad debt (recovery) expense

   (244)   165   (16) 

Stock-based compensation expense

   6,148   6,665   6,857 

Excess tax benefit from stock-based compensation arrangements

   (12,524)   (15,350)   (17,353) 

Deferred income taxes

   8,243   6,986   15,350 

Changes in operating assets and liabilities:

    

Accounts receivable

   2,534   (2,289)   5,157 

Inventories

   445   (5,155)   5,090 

Prepaid expenses, income tax receivable and other assets

   14,936   11,858   (9,447) 

Accounts payable

   (1,811)   5,985   884 

Accrued expenses and taxes and other current liabilities

   5,479   9,014   4,578 

Other liabilities

   (6,304)   8,732   2,019 
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   154,189   168,683   141,211 
  

 

 

  

 

 

  

 

 

 

Cash flows used in investing activities:

    

Purchases of property, plant and equipment

   (49,913)   (74,187)   (151,784) 

Proceeds from sale of property, plant and equipment

   3,855   —     —   

Cash paid for intangible assets

   —     (100)   (100) 

Change in restricted cash

   40   57   53 
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (46,018)   (74,230)   (151,831) 
  

 

 

  

 

 

  

 

 

 

Cash flows (used in) provided by financing activities:

    

Repurchase of Class A Common Stock

   (164,658)   (135,705)   (7,859) 

Proceeds from exercise of stock options

   40,127   42,339   27,272 

Cash paid on note payable and capital lease

   (58)   (54)   (53) 

Excess tax benefit from stock-based compensation arrangements

   12,524   15,350   17,353 

Net proceeds from sale of investment shares

   736   1,408   785 
  

 

 

  

 

 

  

 

 

 

Net cash (used in) provided by financing activities

   (111,329)   (76,662)   37,498 
  

 

 

  

 

 

  

 

 

 

Change in cash and cash equivalents

   (3,158)   17,791   26,878 

Cash and cash equivalents at beginning of year

   94,193   76,402   49,524 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of period

  $91,035  $94,193  $76,402 
  

 

 

  

 

 

  

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid

  $30,978  $45,078  $42,324 
  

 

 

  

 

 

  

 

 

 

Income taxes refunded

  $12,064  $17,252  $—   
  

 

 

  

 

 

  

 

 

 

(Decrease) Increase in accounts payable for repurchase of Class A Common Stock

  $(3,000)  $3,000  $—   
  

 

 

  

 

 

  

 

 

 

Increase (Decrease) in accounts payable for purchase of property, plant and equipment

  $2,678  $(1,843)  $268 
  

 

 

  

 

 

  

 

 

 

             
 
Year Ended
 
 
December 28,
  
December 29,
  
December 30,
 
 
2019
  
2018
  
2017
 
Cash flows provided by operating activities:
 
 
 
 
 
 
 
 
 
Net income
 
$
110,041
 
 
$
92,663
 
 
$
99,049
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
56,271
 
 
 
51,968
 
 
 
51,256
 
Impairment of assets
 
 
911
 
 
 
652
 
 
 
2,451
 
Loss on disposal of property, plant and equipment
 
 
871
 
 
 
64
 
 
 
764
 
Change in ROU assets
 
 
4,207
 
 
 
—  
 
 
 
—  
 
Bad debt expense
 
 
45
 
 
 
2
 
 
 
—  
 
Stock-based compensation expense
 
 
12,337
 
 
 
10,035
 
 
 
6,316
 
Deferred income taxes
 
 
7,404
 
 
 
14,350
 
 
 
(22,442
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(12,260
)
 
 
(1,636
)
 
 
2,945
 
Inventories
 
 
(24,932
)
 
 
(21,312
)
 
 
(1,741
)
Prepaid expenses, income tax receivable and other assets
 
 
(13,862
)
 
 
(552
)
 
 
(4,511
)
Accounts payable
 
 
21,417
 
 
 
6,352
 
 
 
245
 
Accrued expenses and other current liabilities
 
 
18,618
 
 
 
10,130
 
 
 
2,671
 
Change in operating lease liability
 
 
(3,277
)
 
 
—  
 
 
 
—  
 
Other liabilities
 
 
451
 
 
 
731
 
 
 
(1,021
)
             
Net cash provided by operating activities
 
 
178,242
 
 
 
163,447
 
 
 
135,982
 
             
Cash flows used in investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
 
 
(93,233
)
 
 
(55,460
)
 
 
(32,987
)
Proceeds from sale of property, plant and equipment
 
 
165
 
 
 
27
 
 
 
25
 
Cash paid for acquisition of intangible assets
 
 
—  
 
 
 
(50
)
 
 
—  
 
Investment in Dogfish Head, net of cash acquired
 
 
(165,517
)
 
 
—  
 
 
 
—  
 
Other investing activities
 
 
(244
)
 
 
139
 
 
 
33
 
             
Net cash used in investing activities
 
 
(258,829
)
 
 
(55,344
)
 
 
(32,929
)
             
Cash flows provided by (used in) financing activities:
 
 
 
 
 
 
 
 
 
Repurchase of Class A Common Stock
 
 
—  
 
 
 
(88,312
)
 
 
(144,602
)
Proceeds from exercise of stock options
 
 
8,063
 
 
 
22,143
 
 
 
15,415
 
Payment of taxes related to exercise of stock options
 
 
  
 
 
 
—  
 
 
 
—  
 
Net cash paid on note payable and
finance leases
 
 
(378
)
 
 
(78
)
 
 
(60
)
Cash borrowed on line of credit
 
 
97,000
 
 
 
—  
 
 
 
—  
 
Cash paid on line of credit
 
 
(97,000
)
 
 
—  
 
 
 
—  
 
Net proceeds from sale of investment shares
 
 
1,173
 
 
 
906
 
 
 
796
 
             
Net cash provided by (used in) financing activities
 
 
8,858
 
 
 
(65,341
)
 
 
(128,451
)
             
Change in cash and cash equivalents
 
 
(71,729
)
 
 
42,762
 
 
 
(25,398
)
Cash and cash equivalents at beginning of year
 
 
108,399
 
 
 
65,637
 
 
 
91,035
 
             
Cash and cash equivalents at end of period
 
$
36,670
 
 
$
  108,399
 
 
$
65,637
 
             
             
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
 
 
Non cash consideration issued in Dogfish Head Transaction
 
$
144,743
 
 
$
—  
 
 
$
—  
 
             
Income taxes paid
 
$
30,760
 
 
$
11,353
 
 
$
43,006
 
             
Income taxes refunded
 
$
18
 
 
$
5,000
 
 
$
—  
 
             
Cash paid for amounts included in measurement of lease liabilities
 
          
 
Operating cash flows from operating leases
 
$
4,696
  
$
—
  
$
—
 
Operating cash flows from finance leases
 
$
56
  
$
—
  
$
—
 
Financing cash flows from finance leases
 
$
313
  
$
—
  
$
—
 
             
Right-of-use
assets obtained in exchange for operating lease obligations
 
$
57,966
 
 
$
—  
 
 
$
—  
 
      ��      
Right-of-use
assets obtained in exchange for
finance
 lease obligations
 
$
2,837
 
 
$
—  
 
 
$
—  
 
             
Interest paid on revolving credit facility
 
$
451
 
 
$
—  
 
 
$
—  
 
             
Increase (decrease) in accounts payable for purchase of property, plant and equipment
 
$
3,994
 
 
$
2,609
 
 
$
(2,689
)
             
Increase in accrued expenses for 
purchase of property, plant and equipment 
 
$
2,638
 
 
$
—  
 
 
$
—  
 
             
The accompanying notes are an integral part of these consolidated financial statements.


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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016

A. Organization and Basis of Presentation

28, 2019

A.
Organization and Basis of Presentation
The Boston Beer Company, Inc. and certain subsidiaries (the “Company”) are engaged in the business of selling alcohol beverages throughout the United States and in selected international markets, under the trade names “The Boston Beer Company
®
”, “Twisted Tea Brewing Company
®
” “Angry Orchard Cider Company” and, “Hard Seltzer Beverage Company.Company”, “Angry Orchard
®
Cider Company”, “Dogfish Head
®
Craft Brewery”, “Angel City
®
Brewing Company”, “Concrete Beach Brewery
®
” The Company’s Samuel Adams, “Coney Island
® beers are produced
Brewing Company” and sold under the trade name “The Boston Beer Company.” A&S Brewing Collaborative LLC, d/b/a A&S Brewing (“A&S”), a wholly-owned subsidiary of the Company, sells beer under various trade names that is produced under its own license and the Company’s licenses. In 2016, sales from A&S brands were less than 5% of net revenues, in 2015, sales from A&S brands were less than 7% of net revenues and in 2014, sales from A&S brands were less than 2% of net revenues.

B. Summary of Significant Accounting Policies

“American Fermentation Company”.

B.
Summary of Significant Accounting Policies
Fiscal Year

The Company’s fiscal year is a
fifty-two
or fifty-three weekfifty-three-week period ending on the last Saturday in December. The 2019, 2018 and 2017 fiscal period 2016 consistsyears all consisted of fifty-three weeks and the fiscal periods 2015 and 2014 consist of
fifty-two
weeks.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All intercompany transactions and balances have been eliminated in consolidation.

Segment Reporting

The Company consists of two operating segments that each produce and sell alcohol beverages. The first is the Boston Beer Company operating segment comprised of the Company’s Samuel Adams®, Twisted Tea®, Angry Orchard® and Truly Spiked & Sparkling® brands. The second is the A&S Brewing Collaborative operating segment which is comprised of The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewing Company and Concrete Beach Brewing Company. Both segments have similar economic characteristics. They sell predominantly low alcohol beverages, which are sold to the same types of customers in similar size quantities, at similar price points and through substantially the same channels of distribution. These beverages are manufactured using similar production processes, have comparable alcohol content and generally fall under the same regulatory environment. Since the operating segments are similar in the areas outlined above, they are aggregated for financial statements purposes.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents at December 31, 201628, 2019 and December 26, 201529, 2018 included cash
on-hand
and money market instruments that are highly liquid investments. Cash and cash equivalents are carried at cost, which approximates fair value.

The Company has restricted cash associated with a term note agreement with Bank of America that was required by the Commonwealth of Pennsylvania to fund economic development at the Company’s Pennsylvania Brewery. The restricted cash subject to this agreement amounted to $400,000$213,000 and $456,000$278,000 at December 31, 201628, 2019 and December 26, 2015,29, 2018, respectively, and is included in other assets on the Company’s Consolidated Balance Sheets.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable primarily consist of trade receivables. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of December 31, 201628, 2019 and December 26, 201529, 2018 are adequate, but actual write-offs could exceed the recorded allowance.

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Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and trade receivables. The Company places its cash equivalents with high credit quality financial institutions. As of December 31, 2016,28, 2019, the Company’s cash and cash equivalents were invested in investment-grade, highly-liquidhighly liquid U.S. government agency corporate money market accounts.

The Company sells primarily to a network of independent wholesalers in the United States and to a network of foreign wholesalers, importers or other agencies (collectively referred to as “Distributors”). In 2016, 20152019, 2018 and 2014,2017, sales to foreign Distributors were approximately 4% of total sales. Receivables arising from these sales are not collateralized; however, credit risk is minimized as a result of the large and diverse nature of the Company’s customer base. There were no0 individual customer accounts receivable balances outstanding at December 31, 2016 and28, 2019 or December 26, 201529, 2018 that were in excess of 10% of the gross accounts receivable balance on those dates. NoNaN individual customers represented more than 10% of the Company’s revenues duringin fiscal years 2016, 2015, and 2014.

2019, 2018, or 2017.

Financial Instruments and Fair Value of Financial Instruments

The Company’s primary financial instruments at December 28, 2019 and December 29, 2018 consisted of cash equivalents, accounts receivable,
and
accounts payable and accrued expenses at December 31, 2016 and December 26, 2015.payable. The Company determines the fair value of its financial assets and liabilities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”). The Company believes that the carrying amount of its cash equivalents, accounts receivable,
and
accounts payable and accrued expenses approximates fair value due to the short-term nature of these assets and liabilities. The Company is not exposed to significant interest, currency or credit risks arising from these financial assets and liabilities.

Inventories and Provision for Excess or Expired Inventory

Inventories consist of raw
and packaging 
materials, work in process and finished goods. Raw materials, which principally consist of hops, malt, apple juice, other brewing materials and packaging, are stated at the lower of cost
(first-in,
first-out
basis) or marketnet realizable value. The Company’s goal is to maintain
on-hand
a supply of approximately two years for essential hop varieties, in order to limit the risk of an unexpected reduction in supply. Inventories are generally classified as current assets. The Company classifies hops inventory in excess of two years of forecasted usage in other long-term assets. The cost elements of work in process and finished goods inventory consist of raw materials, direct labor and manufacturing overhead. Packaging design costs are expensed as incurred.

The Company enters into multi-year purchase commitments in order to secure adequate supply of ingredients and packaging, to brew and package its products. Inventory on hand and under purchase commitments totaled approximately $222.8 million at December 28, 2019.

The provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand and under contract. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various ingredients. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provisions for excess inventory are included in cost of goods sold and have historically been adequate to provide for losses on its inventory.

The computation of the excesscover incurred inventory requires management to make certain assumptions regarding future sales growth, product mix, new products, cancellation costs, and supply, among others. The Company manages inventory levels and purchase commitments in an effort to maximize utilization of inventory on hand and under commitments. The Company’s accounting policy for inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed management’s expected future usage.losses. Provision for excess or expired inventory included in cost of goods sold was $4.5$8.1 million, $4.0$4.2 million, and $6.1$5.8 million in fiscal years 2016, 2015,2019, 2018, and 2014,2017 respectively.

Property, Plant and Equipment

Property, plant, and equipment are stated at cost. Expenditures for repairs and maintenance are expensed as incurred. Major renewals and betterments that extend the life of the property are capitalized. SomeDepreciation is
47
Table of the Company’s equipment is used by other brewing companies to produce the Company’s products under brewing service arrangements (Note J). Depreciation is Contents
computed using the straight-line method based upon the estimated useful lives of the underlying assets as follows:

Kegs 5 years
Kegs
5 years
Computer software and equipment
 
2 to 5 years
Office equipment and furniture
 
3 to 7 years
Machinery and plant equipment
 
3
to
20
years, or the term of the production agreement, whichever is shorter
Leasehold improvements
 
Lesser of the remaining term of the lease or estimated useful life of the asset
Building and building improvements
 
12
to
20
years, or the remaining useful life of the building, whichever is shorter

The carrying value of property, plant and equipment, net of accumulated depreciation, at December 28, 2019 was $538.5 million. For purposes of determining whether there are any impairment losses, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. If an impairment loss is
identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of potential impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, and the remaining useful life of the asset. Impairment of assets included in operating expenses was $0.9 million, $0.7 million, and $2.5 million in fiscal years 2019, 2018 and 2017, respectively.
Factors generally considered important which could trigger an impairment review on the carrying value of long-lived assets include the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner of use of acquired assets or the strategy for the Company’s overall business; (3) underutilization of assets; and (4) discontinuance of products by the Company or its customers. The Company believes that the carrying value of its long-lived assets as of December 28, 2019 and December 29, 2018 was realizable.
Segment Reporting
The Company consists of one operating segment that produces and sells alcohol beverages under the Company’s Samuel Adams, Twisted Tea, Truly Hard Seltzer, Angry Orchard, Dogfish Head, Angel City, Coney Island, Concrete Beach, Wild Leaf and Tura brands. All brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and through the same channels of distribution.
Goodwill and Intangible Assets
The Company does not amortize goodwill and tradename intangible assets but evaluates the recoverability by comparing the carrying value and the fair value annually at the end of the fiscal month of August, or more
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frequently when indicators of impairment are present. The Company has concluded that its goodwill and intangible assets were not impaired as of December 28, 2019 and December 29, 2018. Customer relationship intangible assets are amortized over the useful life of fifteen years. As of December 28, 2019, and December 29, 2018, goodwill amounted to $112.5
 million and $
3.7
 million, respectively. As of December 28, 2019, and December 29, 2018, intangible assets amounted to $
104.3
 million and $
2.1
 million, respectively. The increase in 2019 in goodwill and intangible assets was due to the Dogfish Head transaction. See Note C for further discussion.
Refundable Deposits on Kegs and Pallets

The Company distributes its draft beer in kegs and packaged beer primarily in glass bottles and cans and such kegs, bottles and cans are shipped on pallets to Distributors. Most kegs and pallets are owned by the Company. Kegs are reflected in the Company’s balance sheets at cost and are depreciated over the estimated useful life of the keg, while pallets are expensed upon purchase. Upon shipment of beer to Distributors, the Company collects a refundable deposit on the kegs and pallets, which is included in current liabilities in the Company’s balance sheets. Upon return of the kegs and pallets to the Company, the deposit is refunded to the Distributor.

The Company has experienced some loss of kegs and pallets and anticipates that some loss will occur in future periods due to the significant volume of kegs and pallets handled by each Distributor and retailer, the homogeneous nature of kegs and pallets owned by most brewers, and the relatively small deposit collected for each keg when compared with its market value. The Company believes that this is an industry-wide issue and that the Company’s loss experience is not atypical. The Company believes that the loss of kegs and pallets, after considering the forfeiture of related deposits, has not been material to the financial statements. The Company uses internal records, records maintained by Distributors, records maintained by other third partythird-party vendors and historical information to estimate the physical count of kegs and pallets held by Distributors. These estimates affect the amount recorded as property, plant and equipment and current liabilities as of the date of the financial statements. The actual liability for refundable deposits could differ from these estimates. For the year ended December 31, 2016,28, 2019, the Company decreased its liability for refundable deposits, gross property, plant and equipment and related accumulated depreciation by $1.1$0.8 million, $1.4$1.3 million and $1.4$1.3 million, respectively. For the year ended December 26, 2015,29, 2018, the Company decreased its liability for refundable deposits, gross property, plant and equipment and related accumulated depreciation by $0.9 million, $1.2 million, $1.1 million and $1.2$1.1 million, respectively. As of December 31, 201628, 2019, and December 26, 2015,29, 2018, the Company’s balance sheet includes $14.3$19.5 million and $17.1$17.0 million, respectively, in refundable deposits on kegs and pallets and $12.0$0.5 million and $18.9$1.9 million, respectively, in kegs, net of accumulated depreciation.

Goodwill

The Company does not amortize goodwill, but evaluates the recoverability of goodwill by comparing the carrying value

Income Taxes
Income tax expense was $34.3 million, $23.6 million, and the fair value of its reporting units annually at the end of the$17.1 million in fiscal month of August, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company has concluded that its goodwill was not impaired as of December 31, 2016years 2019, 2018, and December 26, 2015. As of December 31, 2016 and December 26, 2015, the goodwill of the Boston Beer Company reporting unit amounted to $1.4 million. As of December 31, 2016 and December 26, 2015, the goodwill of the A&S Brewing Collaborative reporting unit amounted to $2.3 million.

Long-lived Assets

Long-lived assets are recorded at cost and depreciated over their estimated useful lives. For purposes of determining whether there are any impairment losses, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, when indicators of impairment are present. For all long-lived assets, if an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such a loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings.

Factors generally considered important which could trigger an impairment review on the carrying value of long-lived assets include the following: (1) significant underperformance relative to historical or projected future operating results; (2) significant changes in the manner of use of acquired assets or the strategy for the Company’s overall business; (3) underutilization of assets; and (4) discontinuance of products by the Company or its customers. The Company believes that the carrying value of its long-lived assets was realizable as of December 31, 2016 and December 26, 2015.

Income Taxes

2017, respectively. The Company provides for deferred taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. This results in differences between the book and tax basesbasis of the Company’s assets, and liabilities and carryforwards,carry-forwards, such as tax credits. In estimating future tax consequences, all expected future events, other than enactment of changes in the tax laws or rates, are generally considered. Valuation allowances are provided when recovery of deferred tax assets does not meet the more likely than not standards as defined in ASC Topic 740,

Income Taxes
.

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different state tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include inquiries regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company records estimated reserves for exposures associated with positions that it takes on its income tax returns that do not meet the more likely than not standards as defined in ACSASC Topic 740,
Income Taxes
.

Excise Taxes

The Company is responsible Historically, the valuation allowances and reserves for compliance withuncertain tax positions have been adequate to cover the Alcoholrelated tax exposures.

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Revenue Recognition and Tobacco Tax and Trade BureauClassification of the U.S. Treasury Department (the “TTB”) regulations which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense based upon units shipped and on its understanding of the applicable excise tax laws.

Revenue Recognition

Net revenue includes product sales, less the distributor promotional discount allowance, certain Distributor incentives, as discussed below in Customer Programs and Incentives

During fiscal years 2019, 2018 and 2017 approximately 95% of the staleCompany’s revenue was from shipments of its products to domestic Distributors and 4% from shipments to international Distributors, primarily located in Canada. Approximately 1% of the Company’s revenue is from retail beer, accrualcider, food and excise taxes. merchandise sales at the Company’s retail locations.
The Company recognizes revenue on product sales atwhen obligations under the time whenterms of a contract with its customer are satisfied; generally, this occurs with the producttransfer of control of its products. Revenue is shipped andmeasured as the following conditions are met: persuasive evidenceamount of an arrangement exists, title has passedconsideration expected to the customer according to the shipping terms, the price is fixed and determinable, and collection of the sales proceeds is reasonably assured.be received in exchange for transferring products. If the conditions for revenue recognition are not met, the Company defers the revenue until all conditions are met. As of December 31, 201628, 2019, and December 26, 2015,29, 2018, the Company hashad deferred $5.4revenue of $7.0 million and $3.9$4.6 million, in revenuerespectively, related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of its products in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys stale beer that is returned by Distributors. The Company generally credits approximately fifty percent of the distributor’s cost of the beer that has passed its freshness expiration date for freshness when it is returned to the Company or destroyed. The Company reduces revenue and establishes an accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue; however,revenue. Historically, the cost of actual stale beer expense incurred byreturns has been in line with established reserves; however, the Companycost could differ materially from the estimated accrual.

Costreserves which would impact revenue. As of Goods Sold

The following expensesDecember 28, 2019, and December 29, 2018, the stale beer reserve was $1.8 million and $2.1 million, respectively. These amounts are included in cost of goods sold: raw material costs, packaging costs, costsaccrued expenses and income related to deposit activity, purchasing and receiving costs, manufacturing labor and overhead, brewing and processing costs, inspection costs relating to quality control, inbound freight charges, depreciation expense related to manufacturing equipment and warehousing costs, which include rent, labor and overhead costs.

Shipping Costs

Costs incurred for the shipping of products to customers are included in advertising, promotional and selling expensesother current liabilities in the accompanying consolidated statements of comprehensive income. The Company incurred shipping costs of $49.2 million, $62.2 million, and $62.6 million in fiscal years 2016, 2015, and 2014, respectively.

Advertising and Sales Promotions

The following expenses are included in advertising, promotional and selling expenses in the accompanying consolidated statements of comprehensive income: media advertising costs, sales and marketing expenses, salary and benefit expenses and meals, travel and entertainment expenses for the sales, brand and sales support workforce, promotional activity expenses, freight charges related to shipments of finished goods from manufacturing locations to distributor locations andpoint-of-sale items. Total advertising and sales promotional expenditures of $105.3 million, $120.1 million, and $100.5 million were included in advertising, promotional and selling expenses in the accompanying consolidated statements of comprehensive income for fiscal years 2016, 2015, and 2014, respectively.

The Company conducts certain advertising and promotional activities in its Distributors’ markets and the Distributors make contributions to the Company for such efforts. Reimbursements from Distributors for advertising and promotional activities are recorded as reductions to advertising, promotional and selling expenses.

Customer Programs and Incentives

balance sheets.

Customer programs and incentives which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. The Company makes these

payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses, in accordance with ASC Topic605-50,Revenue Recognition — Customer Payments and Incentives,based on the nature of the expenditure. Customer incentives and other payments made to Distributors are primarily based upon the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to,

point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $54.4$75.2 million, $55.3$55.5 million and $52.4$51.8 million in fiscal year 2016, 2015,years 2019, 2018 and 2014,2017, respectively.

Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2016, 2015,2019, 2018 and 20142017 were $33.2$43.9 million, $33.2$34.5 million and $28.5$30.2 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. Agreed-uponThe agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company,Company; however, the amounts could differ from the estimated allowance.

allowances.

Customer incentives and other payments are made primarily to Distributors based upon the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities
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promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2016, 2015,2019, 2018 and 20142017 were $21.2$31.3 million, $22.1$21.0 million and $23.9$21.6 million, respectively. In 2016, 2015,fiscal years 2019, 2018 and 2014,2017, the Company recorded certain of these costs in the total amount of $16.1$21.6 million, $16.6$13.9 million and $18.7$15.3 million, respectively as reductions to net revenue. Costs recognized as reduction toin net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets.

These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at the period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

In connection with its preparation of financial statements and other financial reporting, management is required to make certain estimates and assumptions regarding the amount, timing and classification of expenditures resulting from these activities. Actual expenditures incurred could differ from management’s estimates and assumptions.
Excise Taxes
The Company is responsible for compliance with the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department (the “TTB”) regulations, including making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense based upon units shipped and on its understanding of the applicable excise tax laws.
The Company benefited from a reduction in federal excise taxes of $8.9
million
and $6.1 million in fiscal years 2019 and 2018, respectively, as a result of the Tax Cuts and Jobs Act of 2017.
Cost of Goods Sold
The following expenses are included in cost of goods sold: raw material costs, packaging
 material
costs, costs and income related to deposit activity, purchasing and receiving costs, manufacturing labor and overhead, brewing and processing costs, inspection costs relating to quality control, inbound freight charges, depreciation expense related to manufacturing equipment and warehousing costs, which include rent, labor and overhead costs.
Shipping Costs
Costs incurred for the shipping of products to customers are included in advertising, promotional and selling expenses in the accompanying consolidated statements of comprehensive income. The Company incurred shipping costs of $69.1 million, $61.8 million, and $45.3 million in fiscal years 2019, 2018 and 2017, respectively.
Advertising and Sales
Promotions
The following expenses are included in advertising, promotional and selling expenses in the accompanying consolidated statements of comprehensive income: media advertising costs, sales and marketing expenses, salary and benefit expenses and meals, travel and entertainment expenses for the sales, brand and sales support workforce, promotional activity expenses, shipping costs related to shipments of finished goods from manufacturing locations to distributor locations and
point-of-sale
items. Total advertising and sales promotional expenditures of $177.2 million, $145.1 million, and $128.0 million were included in advertising, promotional and selling expenses in the accompanying consolidated statements of comprehensive income for fiscal years 2019, 2018 and 2017, respectively.
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The Company conducts certain advertising and promotional activities in its Distributors’ markets and the Distributors make contributions to the Company for such efforts. Reimbursements from Distributors for advertising and promotional activities are recorded as reductions to advertising, promotional and selling expenses.
General and Administrative
Expenses

The following expenses are included in general and administrative expenses in the accompanying consolidated statements of comprehensive income: general and administrative salary and benefit expenses, stock compensation, insurance costs, consulting and professional service fees, rent and utility expenses, meals, travel and entertainment expenses for general and administrative employees, and other general and administrative overhead costs.

Stock-Based Compensation

The Company accounts for share-based awards in accordance with ASC Topic 718,
Compensation —– Stock Compensation
(“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures.

Stock-based compensation was $12.3 million, $10.0 million and $6.3 million in fiscal years 2019, 2018 and 2017, respectively.

As permitted by ASC 718, the Company elected to use a lattice model, such as the binomialtrinomial option-pricing model, to estimate the fair values of stock options, withoptions. All option-pricing models require the exceptioninput of subjective assumptions. These assumptions include the estimated volatility of the 2008Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and 2016 stock option grants to the Company’s Chief Executive Officer, which is considered to be a market-based award and was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome.expected exercise behavior. See Note LN for further discussion of the application of the option-pricing models.

In addition, an estimated
pre-vesting
forfeiture rate is applied in the recognition of the compensation charge. Periodically, the Company grants performance-based stock options. The Company only recognizes compensation expense with respect to these options if it is probable that the performance targets will be met. Consequently, at the end of each reporting period, the Company estimates whether it is probable that performance targets will be met. Changes in the subjective assumptions and estimates can materially affect the amount of stock-based compensation expense recognized in the consolidated statements of comprehensive income.
Net Income Per Share

Basic net income per share is calculated by dividing net income by the weighted-average common shares outstanding. Diluted net income per share is calculated by dividing net income by the weighted-average common shares and potentially dilutive securities outstanding during the period using the treasury stock method or the
two-class
method, whichever is more dilutive.

Recent

Accounting Pronouncements

Recently

Adopted
In May 2014, the FASB issued ASUNo.
 2014-09,
Revenue from Contracts with Customers (Topic
(Topic 606). ASU
2014-09 will supersede
supersedes virtually all existing revenue guidance. Under this update,standard, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will needneeds to use more judgment and make more estimates than under the currentprevious guidance. ASU2014-09 is to be applied retrospectively either to each prior reporting period presented inOn December 31, 2017, the financial statements, orCompany adopted the new accounting standard and all related amendments using the modified retrospective method which allows application only to the most current reporting period presented in the financial statements with a cumulative
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effect adjustment to retained earnings. In accordance with the new accounting standard, the majority of the Company’s revenue continues to be recognized at the time its products are shipped. Upon adoption, the Company began recognition of certain variable customer promotional discount programs earlier than it had under the previous revenue guidance which resulted in a $1.0 million, net of tax, cumulative effect adjustment to retained earnings in the first quarter of 2018. In the fourth quarter of 2019, a tax provision adjustment resulted in a $0.3 million adjustment to retained earnings. The Company will elect to applyconsiders the impact (if any) of applying ASU2014-09 to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASUNo. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU2015-14 defers the effective date of ASU2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. The Company currently expects to adopt ASU2014-09 in the first quarter of 2018. The Company does not expect adoption of ASU2014-09be immaterial to have a material impact on its consolidated financial statements.

In July 2015, the FASB issued ASUNo. 2015-11,Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU2015-11 is part of the FASB’s initiative to simplify accounting standards. The guidance requiresstatements on an entity to recognize inventory within scope of the standard at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. ASU2015-11 will be effective prospectively for the year beginning January 1, 2017. The Company is currently evaluating the impact of ASU2015-11 and has preliminarily concluded that it will not have a significant impact on the consolidated financial statements.

In November 2015, the FASB issued ASUNo. 2015-17,Balance Sheet Classification of Deferred Taxes. ASU2015-17 is part of the FASB’s initiative to simplify accounting standards. The guidance requires an entity to present deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet. ASU2015-17 permits entities to apply the amendments either prospectively or retrospectively. ASU2015-17 will be effective for the year beginning January 1, 2017. The Company is currently evaluating the impact ASU2015-17. As of December 31, 2016 and December 26, 2015, the Company had $7.4 million and $7.0 million, respectively, of current deferred tax assets on the consolidated balance sheets that would be classified as noncurrent under the new guidance.

ongoing basis.

In February 2016, the FASB issued ASUNo.
 2016-02,
Leases (Topic 842)
. The guidance requires lessees to recognize
right-of-use
(“ROU”) assets and lease liabilities on thetheir balance sheetsheets for the rights and obligations created by all leases with terms of more than 12 months. Under ASU
2016-02, will be effective retrospectively
lessees are permitted to use a modified retrospective approach, which requires an entity to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented for the year beginning December 30, 2018, with early adoption permitted. AsIn July 2018, the FASB issued ASU No.
 2018-11,
Leases (Topic 842)
, permitting the use of an alternative modified retrospective approach that would result in an entity recognizing a lease liability and ROU asset as of the effective date of the requirements, with all comparative periods presented and disclosed, in accordance with the requirements under ASC 840, Leases, changing the date of initial application to the beginning of the period of adoption. On December 31, 2016 and December 26, 2015,30, 2018, the Company had $15.9adopted the new accounting standard using the alternative modified retrospective approach, applying ASC 840 to all comparative periods, including disclosures. Upon adoption, the Company recognized ROU assets o
f
$
27.0 million and $17.5lease liabilities of $31.5 million respectively,
, with the difference of contractual$
4.5
million
due to a reduction to the gross ROU asset for the Company’s existing obligation onassociated with deferred rent and lease agreements that would be included on the consolidated balance sheets under the new guidance.

incentives.

In March 2016, the FASB issued ASUNo.
 2016-09,
Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
. ASU
2016-09
is part of the FASB’s initiative to simplify accounting standards. The guidance impactsimpacted several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes and forfeitures, as well as classification in the statementconsolidated statements of cash flows. Under ASU
2016-09,
excess tax benefits and deficiencies as a result of stock option exercises and restricted stock vesting are to be recognized as discrete items within income tax expense or benefit in the statementconsolidated statements of operationscomprehensive income in the reporting period in which they occur. Additionally, under ASU
2016-09,
excess tax benefits and deficiencies should be classified along with other income tax cash flows as an operating activity. ASU2016-09 will be effectiveactivity in the consolidated statements of cash flows. The Company adopted this new accounting standard prospectively in the first quarter of 2017. Prior periods have not been adjusted. Under this new accounting standard, for the year beginning January 1,
fifty-two
weeks ended December 28, 2019, December 29, 2018 and December 30, 2017, $4.6 million, $4.2 million and may be applied retrospectively or prospectively. The impact ASU2016-09 will have on the Company’s consolidated financial statements will mainly depend on unpredictable future events, including the timing and value realized upon exercise of stock

options versus the fair value when those options were granted. For the 2016 and 2015 fiscal years, the$4.4 million, respectively, in excess tax benefit from stock-based compensation arrangements was $12.5recognized within the income tax provision in the consolidated statement of comprehensive income and classified as an operating activity in the consolidated statement of cash flows. The Company

conti
nued to
 maintain the current forfeiture policy to estimate forfeitures expected to occur to determine stock-based compensation expense.
In February 2018, the FASB issued ASU No. 2018-02,
 Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
 Under this update, an entity is allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company early adopted this accounting standard prospectively in the first quarter of 2018. Prior periods have not been adjusted. In the first quarter of 2018, the Company
reclassified $
0.2
 million of federal and state income tax effects of the Tax Cut and Jobs Act of 2017 related to defined benefit plans from accumulated other comprehensive income to retained earnings.
Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The guidance requires companies to measure credit losses utilizing a
53
Table of Contents
methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU
2016-13
is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. Prior to ASU No.
 2017-04,
the goodwill impairment test is a
two-step
assessment, if indicators of impairment exist. The first step requires an entity to compare each reporting unit’s carrying value and its fair value. If the reporting unit’s carrying value exceeds the fair value, then the entity must perform the second step, which is to compare the implied fair value of goodwill to its carrying value, and record an impairment charge for any excess of carrying value of goodwill over its implied fair value. An entity also has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU
2017-04
simplifies the goodwill impairment test by eliminating the second step of the test. As such, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. ASU
2017-04
will be effective prospectively for the year beginning December 29, 2019. The Company does not expect the adoption of ASU
2017-04
to have a material impact on its consolidated financial statements.
C.
Dogfish Head Brewery Transaction
On May 8, 2019, the Company entered into definitive agreements to acquire Dogfish Head Brewery (“Dogfish Head”) and various related operations (the “Transaction”), through the acquisition of all of the equity interests held by certain private entities in
Off-Centered
Way LLC, the parent holding company of the Dogfish Head operations. In accordance with these agreements, the Company made a payment of $158.4 million, which was placed in escrow pending the satisfaction of certain closing conditions. The Transaction closed on July 3, 2019, for total consideration of $336.0 million consisting of $173.0 million in cash and 429,291 shares of restricted Class A Common Stock that had an aggregate market value as of July 3, 2019 of $163.0 million, after taking into account a post-closing cash related adjustment. As required under the definitive agreements, 127,146 of the 429,291 shares of restricted Class A Stock have been placed in escrow and will be
released no later than July 3, 2029. These shares had a market value on July 3, 2019 of $48.3 million. The timing of the release of these escrowed shares is primarily related to the continued employment with the Company of Samuel A. Calagione III, one of the two Dogfish Head founders.
The fair value of the Transaction is estimated at approximately $
317.7
 million. The Company estimates that transaction-related and other
non-recurring
costs incurred 
and
 estimated
to be incurred
as a result of the Transaction will total approximately $12.0 million
.
Of this total, $10.0 million had been expensed as of D
ecember 28, 2019 and
consists of $3.3 million in transaction costs and $
6.7
 million in other
non-recurring
costs.
Of
the $10.0 million cost
s
incurred
,
 $7.8 million
w
ere
recor
d
ed
in general and administrative expense
and $2.2
m
illion
were rec
orded in cost of goods so
ld within
in the accompanying statements of comprehensive income. As part of the Transaction, certain members of Dogfish Head management entered into employment agreements with the Company and were granted
906
shares of restricted stock units that vest in one year and have a fair value of approximately $
345,000
. The Company funded the cash component of the Transaction through cash
on-hand
and its existing line of credit.
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Table of Contents
The following table summarizes the acquisition date fair value of the tangible assets, intangible assets, liabilities assumed, and related goodwill acquired from Dogfish Head, as well as the allocation of purchase price paid:
     
 
Total (In Thousands)
 
Cash and cash equivalents
 $
7,476
 
Accounts receivable
  
8,081
 
Inventories
  
9,286
 
Prepaid expenses and other current assets
  
847
 
Property, plant and equipment
  
106,964
 
Goodwill
  
108,846
 
Brand
  
98,500
 
Other intangible assets
  
3,800
 
Other assets
  
378
 
     
Total assets acquired
  
344,178
 
     
Accounts payable
  
3,861
 
Accrued expenses and other current liabilities
  
4,085
 
Deferred income taxes
  
18,437
 
Other liabilities
  
59
 
     
Total liabilities assumed
  
26,442
 
     
Net assets acquired
 $
  317,736
 
     
Cash consideration
 $
172,993
 
Nominal value of equity issued
  
162,999
 
Fair Value reduction due to liquidity
  
(18,256
)
     
Estimated total purchase price
 $
317,736
 
     
The Company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of Dogfish Head based on their fair values as of the Transaction closing date. The Company believes that the information available as of the Transaction closing date provides a reasonable basis for estimating the fair values of the assets acquired and liabilities assumed; however, the Company is continuing to finalize these amounts, particularly with respect to income taxes and valuation of inventories, fixed assets, and intangible assets. Thus, the preliminary measurements of fair value reflected are subject to change as additional information becomes available and as additional analysis is performed. The Company expects to finalize the valuation and complete the allocation of the purchase price as soon as practicable, but no later than one year from the closing date of the acquisition, as required.
The fair value of the Dogfish Head brand trade name is estimated at approximately $98.5 million and $15.4 million, respectively.

C. Inventories

Inventories consistthe fair value of raw materials, work in process and finished goods. Raw materials, which principally consist of hops, apple juice, other brewing materials and packaging, are statedcustomer relationships is estimated at the lower of cost, determined on thefirst-in,first-out basis, or market. The Company’s goal is to maintainon-hand a supply of approximately two years for essential hop varieties, in order to limit the risk of an unexpected reduction in supply. Inventories are generally classified as current assets.$3.8 million. The Company classifies hops inventory inestimated the Dogfish Head brand trade name will have an indefinite life and customer relationships will have an estimated useful life of 15 years. The customer relationship intangible asset will be amortized on a straight-line basis over the 15 year estimated useful life. The fair value of the deferred income tax liability assumed is $18.4 million, representing

the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. The Company used a preliminary consolidated tax rate to determine the net deferred tax liabilities. The Company will record measurement period adjustments as the Company applies the appropriate tax rate for each legal entity within Dogfish Head. The expectation is that the Dogfish Head deferred income taxes will be subject to the Company’s consolidated rate. The excess of two yearsthe purchase price paid over the estimated fair values of forecasted usagethe assets and liabilities assumed has been recorded as goodwill in other long term assets.the amount of $108.8 million. Goodwill associated with the acquisition is primarily attributable to the future growth opportunities associated with the Transaction, expected synergies and value of the workforce. The Company believes the majority of the goodwill is deductible for tax purposes.
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Table of Contents
The fair value of the brand trade name was determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and discounted to present value using an appropriate discount rate. The fair value of the property, plant and equipment was determined utilizing the cost elementsand market valuation approaches.
The results of workoperations from Dogfish Head have been included in processthe Company’s consolidated statements of
comprehensive income
since the July 3, 2019 Transaction closing date. During fiscal year 2019, Dogfish Head represented $48.5 million of the Company’s total revenue and finished goods inventory consist$1.6 million of raw materials, direct labortotal net income. Transaction costs incurred by the Company in connection with the Transaction were $3.3 million in fiscal year 2019 and manufacturing overhead. were recorded within general and administrative expenses in the Company’s consolidated statements of
comprehensive income
.
Consistent with prior periods and considering post-merger reporting structures, the Company will continue to report as one
o
perating segment. The combined Company’s brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and through the same channels of distribution.
The following unaudited pro forma information has been prepared, as if the Transaction and the related debt financing had occurred as of December 31, 2017, the first day of the Company’s 2018 fiscal year. The pro forma amounts reflect the combined historical operational results for Boston Beer and Dogfish Head, after giving effect to adjustments related to the impact of purchase accounting, transaction costs and financing. The unaudited pro forma financial information is not indicative of the operational results that would have been obtained had the Transaction occurred as of that date, nor is it necessarily indicative of the Company’s future operational results. The following adjustments have been made:
(i)Depreciation and amortization expenses were updated to reflect the fair value adjustments to Dogfish Head property, plant and equipment and intangible assets beginning December 31, 2017.
(ii)Transaction costs incurred in the
fifty-two
weeks ended December 28, 2019 have been
re-assigned
to the first period of the comparative fiscal year.
(iii)Interest expense has been included at a rate of approximately 3% which is consistent with the borrowing rate on the Company’s current line of credit.
(iv)The tax effects of the pro forma adjustments at an estimated statutory rate of 25.6%.
(v)Earnings per share amounts are calculated using the Company’s historical weighted average shares outstanding plus the 429,291 shares issued in the merger.
 
Fifty-two
weeks ended
 
 
December 28,
2019
  
December 29,
2018
 
 
(in thousands
, ex
cept per share data)
 
Net revenue
 $
  1,304,239
  $
  1,103,061
 
Net income
 $
116,868
  $
98,700
 
Basic earnings per share
 $
9.83
  $
8.12
 
Diluted earnings per share
 $
9.73
  $
8.04
 
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Table of Contents
D.
Inventories
Inventories consisted of the following:

   December 31,   December 26, 
   2016   2015 
   (in thousands) 

Raw Materials

  $41,630    $42,123  

Work in process

   8,131     8,876  

Finished Goods

   9,054     8,261  
  

 

 

   

 

 

 
   58,815     59,260  

Less portion in other long term assets

   (6,316)    (2,798) 
  

 

 

   

 

 

 
  $52,499    $56,462  
  

 

 

   

 

 

 

D. Prepaid Expenses and Other Current Assets

 
December 28,
2019
  
December 29,
2018
 
 
(in thousands)
 
Current inventory:
      
Raw materials
 $
61,522
  $
  44,655
 
Work in process
  
12,631
   
8,252
 
Finished goods
  
31,885
   
17,342
 
         
Total current inventory
  
106,038
   
70,249
 
Long term inventory
  
10,048
   
11,619
 
         
Total inventory
 $
  116,086
  $
81,868
 
         
E.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:

   December 31,   December 26, 
   2016   2015 
   (in thousands) 

Prepaid malt and barley

  $1,644    $3,184  

Excise and other tax receivables

   1,637     2,093  

Insurance cash surrender value

   1,254     —    

Supplier rebates

   1,158     1,929  

Prepaid insurance

   1,144     1,047  

Lease incentive receivable

   113     1,584  

Other

   1,781     2,216  
  

 

 

   

 

 

 
  $8,731    $12,053  
  

 

 

   

 

 

 

E. Property, Plant and Equipment

 
December 28,
2019
  
December 29,
2018
 
 
(in thousands)
 
Prepaid brewing services fee
-
 short term
(see Note L)
 $
  4,936
  $
  3,789
 
Prepaid advertising, promotional and selling
  
1,649
   
1,518
 
Prepaid software expense
  
1,224
   
754
 
Prepaid insurance
  
1,206
   
1,111
 
Excise and other tax receivables
  
1,173
   
2,179
 
Other
  
1,889
   
3,785
 
         
 $
  12,077
  $
  13,136
 
         
F.
Property, Plant and Equipment
Property, plant and equipment consisted of the following:

   December 31,   December 26, 
   2016   2015 
   (in thousands) 

Machinery and plant equipment

  $420,486    $387,180  

Kegs

   70,024     71,391  

Land

   22,295     25,135  

Building and building improvements

   112,508     101,836  

Office equipment and furniture

   22,412     19,635  

Leasehold improvements

   14,147     12,037  
  

 

 

   

 

 

 
   661,872     617,214  

Less accumulated depreciation

   (253,461)    (207,288) 
  

 

 

   

 

 

 
  $408,411    $409,926  
  

 

 

   

 

 

 

         
 
December 28,
2019
  
December 29,
2018
 
 
(in thousands)
 
Machinery and plant eq
u
ipment
 $
571,506
  $
459,352
 
Kegs
  
66,011
   
67,940
 
Land
  
25,759
   
22,295
 
Building and building improvements
  
130,311
   
115,748
 
Office equipment and furniture
  
29,202
   
25,728
 
Leasehold improvements
  
48,528
   
20,830
 
Assets under construction 
  59,027   22,160 
         
  
930,344
   
734,053
 
Less accumulated depreciation
  
(389,276
)  
(344,264
)
         
 $
541,068
  $
389,789
 
         
The Company recorded depreciation and amortization expense related to these assets of $49.3$
56.1
 million, $43.4$
51.8
 million and $34.8$
51.2
 million, in fiscal years 2016, 2015,2019, 2018, and 2014,2017, respectively.

The Dogfish Head Transaction added $

107.0
 million in gross fixed assets on July 3, 2019. See Note C.
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Table of Contents
Impairment of Assets

The Company evaluates its assets for impairment when events indicate that an asset or asset group may have suffered impairment. During 2016, 2015,fiscal years 2019, 2018 and 2014,2017, the Company recorded impairment charges of $0.7$
0.9
 million, $0.3$
0.7
 million and $1.8$
2.5
 million, respectively.

Gain

G.
Leases
The Co
m
pany has various lease agreements in place for facilities and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2031. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on Saleinformation available at commencement to determine the present value of Assets

During 2016,the lease payments. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized a $1.0ROU assets of $27.0 million gainand lease liabilities of $31.5 million upon adoption of ASU No.

 2016-02
on December 30, 2018. ROU assets and lease liabilities commencing after December 30, 2018 are recognized at commencement date based on the salepresent value of land owned in Freetown, Massachusetts.

F. Goodwill

Goodwill represents the excess of the purchase price of the Company-owned brewerieslease payments over the fair valuelease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the netbalance sheet and are recognized on a straight-line basis over the lease term. As of December 28, 2019, total ROU assets acquired upon the completion of the acquisitions.

The following table summarizes the Company’s changes to the carrying amount of goodwill for the fifty-three weeks ended December 31, 2016 (in thousands):

   Balance at       Balance at 
   December 26,       December 31, 
   2015   Additions   2016 

Goodwill

  $3,683    $—      $3,683  

G. Accrued Expenses and Other Current Liabilities

lease liabilities were as follows:

Classification
Leases
Righ
t-of-use assets
(in thousands)
Operating lease assets
Operating
right-of-use
assets
$
  53,758
Finance
 lease assets
Property, plant
and equipment, net
2,531
Lease Liabilities
Current
Operating lease liabilities
Current operating lease liabilities
5,168
Finance
 lease liabilities
Accrued expenses and other current
liabilities
546
Non-current
Operating lease liabilities
Non-current
operating lease liabilities
53,940
Finance
 lease liabilities
Other liabilities
2,042
The gross value and accumulated depreciation of ROU assets
related t
o finance leases
as of December 28, 2019 were as follows:
Finance
Leases
(in thousands)
Gross value
$
 2,837
Accumulated amortization
(306
)
Carrying value
$
 2,531
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Table of Contents
Components of leas
e
 cost for the fiscal year-ended are as
follows
:
     
 
Lease Cost
 
 
(in thousands)
 
Operating lease cost
 $
5,625
 
Variable lease costs not included in liability
  1,064 
Finance lease cost:
   
Amortization of
right-of-use
asset
 $
306
 
Interest on lease liabilities
  
56
 
     
Total finance lease cost
 $
362
 
     
Maturities of lease liabilities as of December 28, 2019 are as follows:
                 
 
Operating
Leases
  
Finance

Leases
  
Weighted-Average
 
Remaining Term in
 
Years
 
Operating
 
Leases
  
Finance
 
Leases
 
 
(in thousands)
     
2020
 $
5,755
  $
626
       
2021
  
9,241
   
626
       
2022
  
9,036
   
626
       
2023
  
8,995
   
626
       
2024
  
8,729
   
265
       
Thereafter
  
27,567
   
23
       
                 
Total lease payments
  
69,323
   
2,792
       
Less imputed interest (based on
3.5
% weighted-average discount rate)
  
(10,215
)  
(204
)      
                 
Present value of lease liability
 $
59,108
  $
 2,588
   
8.3
   
4.4
 
                 
H.
Goodwill and Intangible Assets
The change in the carrying value of goodwill and intangible assets during the
fifty-two
weeks ended December 28, 2019 and December 29, 2018 were as follows:
         
 
Fifty-two
weeks ended
 
 
December 28,
  
December 29,
 
 
2019
  
2018
 
 
(
in thousands)
 
Goodwill as of beginning of period
 $
3,683
  $
  3,683
 
Acquired goodwill
  
108,846
   
—  
 
Impairment of goodwill
  
—  
   
—  
 
         
Goodwill as of end of period
 $
  112,529
  $
3,683
 
         
The $108.8 million of goodwill acquired during the
fifty-two
weeks ended December 28, 2019 is related to the Dogfish Head Transaction disclosed in Note C. No impairment of existing goodwill was recorded in the period.
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Table of Contents
The Company’s intangible assets as of December 28, 2019 and December 29, 2018 were as follows:
                             
   
As of December 28, 2019
  
As of December 29, 2018
 
 
Estimated
 
Useful
  
Gross
 
Carrying
  
Accumulated
  
Net Book
  
Gross
 
Carrying
  
Accumulated
  
Net
 
Book
 
 
Life (Years)
  
Value
  
Amortization
  
Value
  
Value
  
Amortization
  
Value
 
 
 
 
 
(
in thou
sands)
 
 
(
in thou
sands)
 
Customer
Relationships
  
15
  $
3,800
  $
(127
) $
3,673
  $
—  
  $
  —  
  $
—  
 
Trade Names
  
Indefinite
   
100,599
   
—  
   
100,599
   
2,099
   
—  
   
2,099
 
                             
Total intangible assets
    $
  104,399
  $
(127
) $
 
104,272
  $
  2,099
  $
—  
  $
  2,099
 
                             
During the
fifty-two
weeks ended December 28, 2019, the Company acquired intangible assets as part of the Dogfish Head Transaction disclosed in Note C, that consists of $98.5 million for the value of the Dogfish Head brand name and $3.8 million for the value of customer relationships. The customer relationship intangible asset will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the
fifty-two
weeks ended December 28, 2019 was approximately $127,000. The Company expects to record amortization expense as follows over the five subsequent years:
     
Fiscal Year
 
Amount
(in th
ousands)
 
2020
  
253
 
2021
  
253
 
2022
  
253
 
2023
  
253
 
2024
  
253
 
I.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other
c
urrent liabilities consisted of the following:

   December 31,   December 26, 
   2016   2015 
   (in thousands) 

Accrued deposits

  $15,814    $18,865  

Employee wages, benefits and reimbursements

   14,116     12,367  

Advertising, promotional and selling expenses

   8,562     11,249  

Deferred revenue

   5,381     3,949  

Accrued stale beer

   5,226     3,254  

Accrued sales and use tax

   2,437     2,656  

Accrued excise taxes

   2,255     3,976  

Accrued freight

   1,402     5,681  

Other accrued liabilities

   5,681     6,387  
  

 

 

   

 

 

 
  $60,874    $68,384  
  

 

 

   

 

 

 

H. Revolving Line of Credit

fol

l
owing:
         
 
December 28,
2019
  
December 29,
2018
 
 
(in thousands)
 
Employee wages, benefits and reimbursements
 $
  35,394
  $
  27,074
 
Accrued deposits
  
20,483
   
18,171
 
Advertising, promotional and selling expenses
  
17,009
   
9,079
 
Deferred revenue
  
6,984
   
4,587
 
Accrued utilities and third party fees
  
4,075
   
1,881
 
Accrued excise taxes
  
2,758
   
2,335
 
Accrued capital
 expenditures
  
2,621
   
—  
 
Accrued freight
  
2,091
   
1,668
 
Other accrued liabilities
  
7,692
   
8,616
 
         
 $
99,107
  $
73,412
 
         
J.
Revolving Line of Credit
The Company has a credit facility in place that provides for a $150.0 million revolving line of credit which has a term not scheduled to expire until March 31, 2019.2023. The Company may elect an interest rate for borrowings under the credit facility based on either (i) the Alternative Prime Rate (3.75%(4.75% at December 31, 2016)2
8
, 201
9
) or (ii) the applicable LIBOR rate (0.72%(1.75% at December 31, 2016)2
8
, 201
9
) plus 0.45%. The Company incurs an annual commitment
60
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fee of 0.15% on the unused portion of the facility and is obligated to meet certain financial covenants, which are
measured using earnings before interest, tax, depreciation and amortization (“EBITDA”) based ratios. The

Company’s EBITDA to interest expense ratio was 11,352

418
as of December 31, 2016,28, 2019, compared to a minimum allowable ratio of
2.00
and the Company’s total funded debt to EBITDA ratio was 0.00
0.0
as of December 31, 2016,28, 2019, compared to a maximum allowable ratio of 2.50. The Company was
2.50
.
During the
fifty-two
weeks ended December 28, 2019, the company borrowed and repaid $
97.0
 million on the credit facility and paid a total of $
0.5
 million in compliance with all financial covenants as of December 31, 2016 and December 26, 2015.related interest. There were no
0
borrowings outstanding under the credit facility as of December 31, 2016 2
8
, 201
9
and December 26, 2015.

29, 201

8
.
There are also certain restrictive covenants set forth in the credit agreement. Pursuant to the negative covenants, the Company has agreed that it will not: enter into any indebtedness or guarantees other than those specified by the lender, enter into any sale and leaseback transactions, merge, consolidate, or dispose of significant assets without the lender’s prior written consent, make or maintain any investments other than those permitted in the credit agreement, or enter into any transactions with affiliates outside of the ordinary course of business. In addition, the credit agreement requires the Company to obtain prior written consent from the lender on distributions on account of, or in repurchase, retirement or purchase of its capital stock or other equity interests with the exception of the following: (a) distributions of capital stock from subsidiaries to The Boston Beer Company, Inc. and Boston Beer Corporation (a subsidiary of The Boston Beer Company, Inc.), (b) repurchase from former employees of
non-vested
investment shares of Class A Common Stock, issued under the Employee Equity Incentive Plan, and (c) redemption of shares of Class A Common Stock as approved by the Board of Directors and payment of cash dividends to its holders of common stock. Borrowings under the credit facility may be used for working capital, capital expenditures and general corporate purposes of the Company and its subsidiaries. In the event of a default that has not been cured, the credit facility would terminate and any unpaid principal and accrued interest would become due and payable.

I. Income Taxes

K.
Income
Taxes
Significant components of the provision for income taxes are as follows:

   2016   2015   2014 
   (in thousands) 

Current:

      

Federal

  $35,390    $42,391    $30,595  

State

   6,108     7,403     8,262  
  

 

 

   

 

 

   

 

 

 

Total current

   41,498     49,794     38,857  

Deferred:

      

Federal

   7,666     6,279     15,407  

State

   608     523     587  
  

 

 

   

 

 

   

 

 

 

Total deferred

   8,274     6,802     15,994  
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

  $49,772    $56,596    $54,851  
  

 

 

   

 

 

   

 

 

 

             
 
2019
 
 
2018
 
 
2017
 
 
(in thousands)
 
Current:
         
Federal
 $
  18,510
  $
4,471
  $
34,255
 
State
  
8,084
   
4,894
   
5,225
 
             
Total current
  
26,594
   
9,365
   
39,480
 
Deferred:
         
Federal
  
8,081
   
12,860
   
(22,489
)
State
  
(346
)  
1,398
   
102
 
             
Total deferred
  
7,735
   
14,258
   
(22,387
)
             
Total provision for income taxes
 $
34,329
  $
23,623
  $
17,093
 
             
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The Company’s reconciliations to statutory rates are as follows:

   2016  2015  2014 

Statutory rate

   35.0%   35.0%   35.0% 

State income taxes, net of federal benefit

   3.6    3.4    4.0  

Deduction relating to U.S. production activities

   (2.6)   (2.7)   (2.1) 

Change in valuation allowance

   (0.3)   —      —    

Other

   0.6    0.8    0.8  
  

 

 

  

 

 

  

 

 

 
   36.3%   36.5%   37.7% 
  

 

 

  

 

 

  

 

 

 

             
 
2019
  
2018
  
2017
 
Statutory rate
  
21.0
%  
21.0
%  
35.0
%
State income taxes, net of federal benefit
  
4.6
   
4.6
   
3.6
 
Deduction relating to U.S. production activities
  
—  
   
—  
   
(3.2
)
Deduction relating to excess stock based compensation
  
(3.2
)  
(3.6
)  
(3.7
)
Change relating to enacted Tax Cuts and Jobs Act
  
—  
   
—  
   
(17.5
)
Non-deductable
meals & entertainment
  
0.7
   
1.1
   
0.9
 
Accounting method changes
  
—  
   
(3.9
)  
—  
 
Change in valuation allowance
  
0.4
   
0.7
   
—  
 
Other
  
0.3
   
0.4
   
(0.4
)
             
  
23.8
%  
20.3
%  
14.7
%
             
Due to a change of tax accounting methods for depreciation of certain property, plant and equipment for the
fiscal
year
-
ended December 30, 2017, the Company experienced a
one-time
income tax benefit of $
4.5
 million for the tax year ended December 29, 2018.
Significant components of the Company’s deferreddefer
r
ed tax assets and liabilities are as follows at:

   December 31,   December 26, 
   2016   2015 
   (in thousands) 

Deferred tax assets:

    

Accrued expenses

  $6,488    $7,435  

Stock-based compensation expense

   5,929     9,493  

Inventory

   1,117     2,398  

Other

   4,097     4,154  
  

 

 

   

 

 

 

Total deferred tax assets

   17,631     23,480  

Valuation allowance

   (669)    (1,036) 
  

 

 

   

 

 

 

Total deferred tax assets net of valuation allowance

   16,962     22,444  

Deferred tax liabilities:

    

Property, plant and equipment

   (72,140)    (69,226) 

Prepaid expenses

   (1,204)    (1,475) 

Goodwill

   (879)    (761) 
  

 

 

   

 

 

 

Total deferred tax liabilities

   (74,223)    (71,462) 
  

 

 

   

 

 

 

Net deferred tax liabilities

  $(57,261)   $(49,018) 
  

 

 

   

 

 

 

 
December 28,
  
December 29,
 
 
2019
  
2018
 
 
(in thousands)
 
Deferred tax assets:
      
Lease Liabilities
 $
15,567
  $
—
 
Inventory
  
5,868
   
1,356
 
Stock-based compensation expense
  
5,818
   
5,156
 
Accrued expenses
  
3,232
   
1,913
 
Other
  
1,914
   
2,478
 
         
Total deferred tax assets
  
32,399
   
10,903
 
Valuation allowance
  
(1,866
)  
(1,291
)
         
Total deferred tax assets net of valuation allowance
  
30,533
   
9,612
 
Deferred tax liabilities:
      
Property, plant and equipment
  
(78,232
)  
(57,099
)
Right-of-use Assets
  
(14,203
)  
—
 
Amortization
  
(10,899
)
 
  
(733
)
 
Prepaid expenses
  
(2,209
)  
(949
)
         
Total deferred tax liabilities
  
(105,543
)  
(58,781
)
         
Net deferred tax liabilities
 $
(75,010
) $
(49,169
)
         
The Company’s practice is to classify interest and penalties related to income tax matters in income tax expense. Interest and penalties included in the provision for income taxes amounted to $0.0$
0.0
 million, $0.1$
0.1
 million, and $0.0$
0.0
 million for fiscal years 2016, 2015,2019, 2018, and 2014,2017, respectively. Accrued interest and penalties amounted to $0.3$0.1 million and $0.4$0.1 million at December 31, 201628, 2019 and December 26, 2015,29, 2018, respectively.

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

   2016   2015 
   (in thousands) 

Balance at beginning of year

  $486    $368  

Increases related to current year tax positions

   80     44  

Increases related to prior year tax positions

   76     117  

Decreases related to settlements

   (50)    —    

Decreases related to lapse of statute of limitations

   (3)    (43) 
  

 

 

   

 

 

 

Balance at end of year

  $589    $486  
  

 

 

   

 

 

 

         
 
2019
  
2018
 
 
(in thousands)
 
Balance at beginning of year
 $
836
  $
292
 
Increases related to current year tax positions
  
101
   
8
 
(Decreases) Increases related to prior year tax positions
  
(63
)  
636
 
Decreases related to settlements
  
—  
   
(100
)
Decreases related to lapse of statute of limitations
  
(63
)  
—  
 
         
Balance at end of year
 $
 
811
  $
836
 
         
Included in the balance of unrecognized tax benefits at December 31, 201628, 2019 and December 26, 201529, 2018 are potential net benefits of $0.5$
0.8
 million and $0.4$
0.8
 million, respectively, that would favorably impact the effective tax rate if recognized. Unrecognized tax benefits are included in accrued expenses in the accompanying consolidated balance sheets and adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.

In September 2017, the Internal Revenue Service (“IRS”) commenced an examination of the Company’s 2015 consolidated corporate income tax return. The examination was completed in July 2018 resulting in a no change report. As of December 31, 2016,28, 2019, the Company’s 2013, 20142016, 2017, and 20152018 federal income tax returns remain subject to examination by the Internal Revenue Service (“IRS”).IRS. The Company’s state income tax returns remain subject to examination for three
or four years depending on the state’s statute of limitations. The Company is being audited by two statesnot currently under any income tax audits as of December 31, 2016.28, 2019. 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 Company’s unrecognized tax benefits may increase or decrease in 20172020 if there isare changes as a completionresult of certainpotential 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 Company’s financial position, results of operations or cash flows.

As of December 31, 2016,28, 2019, the Company’s deferred tax assets includeincluded a capital loss carryforward. The capital loss carryforward totaling $1.7 million as of December 31, 2016, which if$
1.7
 million. If unused, the capital loss carryforward will expire in fiscal year 2019. For the year ended December 31, 2016, the Company recorded a net valuation allowance release of $0.3 million due to a decrease in the deferred tax asset for capital loss carryforwards.

The Company’s short term income tax receivable as of December 26, 2015 of $14.1 million in the accompanying consolidated balance sheets is primarily due to theProtecting Americans from Tax Hikes Act of 2015, being enacted after 2015 corporate estimated tax payments were due on December 15, 2015. These tax extenders allow the Company to claim accelerated tax depreciation on qualified property, plant, and equipment additions, and the research & development tax credit on the 2015 federal corporate income tax return. The Company applied with the IRS for a $12.0 million quick refund of overpayment of estimate tax, and received this refund in the first quarter of 2016.

J. Commitments and Contingencies

2021
.
L.
Commitments and Contingencies
Contractual Obligations

The Company had outstanding totalnon-cancelable contractual obligations of $173.4 million at December 31, 2016. These obligations are made up of hops, barley and wheat totaling $71.1 million, advertising contracts of $27.4 million, apples and other ingredients of $27.2 million, glass bottles of $16.6 million, operating leases of $15.9 million, equipment and machinery of $10.7 million, and other commitments of $4.5 million.

As of December 31, 2016,28, 2019, projected cash outflows under
non-cancelable
contractual obligations for the remaining years under the contracts are as follows:

   Payments Due by Period 
   Total   2017   2018   2019   2020   2021   Thereafter 
   (in thousands) 

Hops, barley and wheat

  $71,128    $27,784    $14,552    $14,692    $4,483    $4,878    $4,739  

Advertising

   27,430     26,825     499     106     —       —       —    

Apples and other ingredients

   27,225     27,225     —       —       —       —       —    

Glass bottles

   16,551     16,551     —       —       —       —       —    

Operating leases

   15,900     3,343     2,965     2,683     2,569     2,625     1,715  

Equipment and machinery

   10,700     10,700     —       —       —       —       —    

Other

   4,505     2,624     1,335     546     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $173,439    $115,052    $19,351    $18,027    $7,052    $7,503    $6,454  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                             
 
Payments Due by Period
 
 
Total
  
2020
  
2021
  
2022
  
2023
  
2024
  
Thereafter
 
 
(in thousands)
 
Brand support
  
80,157
  $
47,380
  $
9,827
  $
9,652
  $
 
4,760
  $
4,338
  $
  4,200
 
Apples and other ingredients
  
52,904
   
47,810
   
2,547
   
2,547
   
—  
   
—  
   
—  
 
Hops, barley and wheat
  
52,466
   
35,589
   
6,346
   
4,503
   
2,288
   
2,157
   
1,583
 
Equipment and machinery
  
35,528
   
35,528
   
—  
   
—  
   
—  
   
—  
   
—  
 
Other
  
20,422
   
17,123
   
2,620
   
364
   
170
   
45
   
100
 
                             
Total contractual obligations
 $
 
241,477
  $
 188,524
  $
 18,793
  $
 
14,519
  $
7,218
  $
 
6,540
  $
5,883
 
                             
The Company has entered into contracts forutilizes several varieties of hops in the supply of a portionproduction of its hops requirements.products. To ensure adequate supplies of these varieties, the Company enters into advance multi-year purchase commitments based on forecasted
future
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hop requirements, among other factors. These purchase contractscommitments extend through crop year 20222025 and specify both the quantities and prices, denominated in U.S. Dollar, Euros, and New Zealand Dollars and British Pounds, to which the Company is committed. Hops purchase commitments outstanding at December 31, 201628, 2019 totaled $56.3$
39.2
 million, based on the exchange rates on that date. The Company does not use forward currency exchange contracts and intends to purchase future hops using the exchange rate at the time of purchase.

These contracts were deemed necessary in order to bring hop inventory levels and purchase commitments into balance with the Company’s current brewing volume and hop usage forecasts. In addition, these contracts enable the Company to secure its position for future supply with hop vendors in the face of some competitive buying activity.

Currently, the Company has entered into contracts for barley and wheat with two2 major suppliers. The contracts include crop years 2016year 2019 and 20172020 and cover the Company’s barley, wheat, and malt requirements for 2017 and part of 2018.2020. These purchase commitments outstanding at December 31, 201628, 2019 totaled $14.8$
13.3
 million.

The Company’s accounting policy for inventory and purchase commitments is to recognize a loss by establishing a reserve to the extent inventory levels and commitments exceed forecasted needs. The computation of the excess inventory requires management to make certain assumptions regarding future sales growth, product mix, cancellation costs and supply, among others. Actual results may differ materially from management’s estimates. The Company sources some of its glass bottles needs pursuantcontinues to a Glass Bottle Supply Agreement with Anchor Glass Container Corporation (“Anchor”), under which Anchor is the supplier of certain glass bottles for the

Company’s Cincinnati Brewerymanage inventory levels and its Pennsylvania Brewery. This agreement also establishes the terms on which Anchor may supply glass bottles to other breweries where the Company brews its beers. Under the agreement with Anchor, the Company has minimum and maximum purchase commitments that are based on Company-provided production estimates which, under normal businessin an effort to maximize utilization. However, changes in management’s assumptions regarding future sales growth, product mix and hops market conditions are expected to be fulfilled. Minimum purchase commitments under this agreement, assuming the supplier is unable to replace lost production capacity cancelled by the Company, as of December 31, 2016 totaled $16.6 million.

The Company has various operating lease agreementscould result in place for facilities and equipment as of December 31, 2016. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2022. Aggregate rent expense was $3.8 million, $3.4 million, and $3.2 million in fiscal years 2016, 2015, and 2014, respectively.

future material losses.

For the fiscal year ended December 31, 2016,28, 2019, the Company brewed over 95%approximately 74% of its core brands volume at Company-owned breweries. In the normal course of its business, the Company has historically entered into various production arrangements with other brewing companies. Pursuant to these arrangements, the Company purchases the liquid produced bysupplies raw materials to those brewing companies, including the raw materials that are used in the liquid,and incurs conversion fees for labor at the time suchthe liquid goes into fermentation. The Company is required to repurchase all unused raw materials purchased by the brewing company specifically for the Company’s beers at the brewing company’s cost upon termination of the production arrangement.produced and packaged. The Company is also obligated to meet annual volume requirements in conjunction with certain production arrangements, which are not material to the Company’s operations.

During fiscal years 2018 and 2019, the Company amended its brewing services agreement with City Brewing to include a minimum capacity availability commitment. The amendment grants the Company the right to extend the agreement beyond the December 31, 2021 termination date on an annual basis through December 31, 2029. The amendments require the Company to pay up to $26.5 million dollars for capital improvements at City Brewing facilities, of which $20.5 million had been paid as of December 28, 2019 and the remaining amount of $6.0 million is expected to be paid in May 2020. In fiscal year 2019, City Brewing supplied approximately 23% of the Company’s annual shipment volume. At December 28, 2019, the Company had prepaid brewing service fees of $4.9 million in prepaid expenses and other current assets and $12.9 million in other assets, long term. The Company plans to expense the total amount of $17.8
million
over a 60 month period ending in 2024.
The Company’s arrangements with other brewing companies require it to periodically purchase equipment in support of brewery operations. As of December 31, 2016,28, 2019, there were no significant equipment purchase requirements outstanding under existing contracts. Changes to the Company’s brewing strategy or existing production arrangements, new production relationships or the introduction of new products in the future may require the Company to purchase equipment to support the contract breweries’ operations.

Litigation

The Company is currently not a party to any pending or threatened litigation, the outcome of which would be expected to have a material adverse effect on its financial condition or the results of its operations.

K. Fair Value Measures

M.
Fair Value
Measures
The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the
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Table of Contents
following
fair
value
hierarchy,
which
prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

All financial assets or liabilities that

The Company’s money market funds are measured at fair value on a recurring basis (at least annually) have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The assets or liabilities measured at fair value on a recurring basis are summarized in the table below (in thousands):

   As of December 31, 2016 
   Level 1   Level 2   Level 3   Total 

Assets:

        

Cash equivalents

  $89,966    $—      $—      $89,966  
   As of December 26, 2015 
   Level 1   Level 2   Level 3   Total 

Assets:

        

Cash equivalents

  $88,108    $—      $—      $88,108  

The Company’s cash equivalents listed above represent money market mutual fund securities and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The

money market funds wereare invested substantially in United States Treasury and government securities. The Company does not adjust the quoted market price for such financial instruments.

Financial instruments that potentially subject the Company to credit risk consist principally Cash, receivables and payables are carried at their cost, which approximates fair value, because of cash and cash equivalents held in money market funds. their short-term nature.

At December 31, 201628, 2019 and December 26, 2015,29, 2018, the Company had money market funds with a “Triple A” rated money market fund. The Company considers the “Triple A” rated money market fund to be a large, highly-rated investment-grade institution. As of December 31, 201628, 2019, and December 26, 2015,29, 2018, the Company’s cash and cash equivalents balance was $91.0$36.7 million and $94.2$108.4 million, respectively, including money market funds amounting to $90.0$29.5 million and $88.1$107.5 million, respectively.

Cash, certificates of deposit, receivables and payables are carried at their cost, which approximates fair value, because of their short-term nature. Financial instruments not recorded at fair value in the consolidated financial statements are summarized in the table below (in thousands):

   As of December 31, 2016 
   Level 1   Level 2   Level 3   Total 

Note payable

  $—      $400    $—      $400  
   As of December 26, 2015 
   Level 1   Level 2   Level 3   Total 

Note payable

  $—      $458    $—      $458  

The Company’s note payable listed above represents a term note agreement with Bank of America N.A and is classified within Level 2 of the fair value hierarchy because it is valued using observable inputs. The note has a maturity date of December 31, 2021 and the interest rate is fixed at an annual rate of 4.25%.

L. Common Stock and Share-Based Compensation

N.
Common
Stock and Share-Based
Compensation
Class A Common Stock

The Class A Common Stock has no voting rights, except (1) as required by law, (2) for the election of Class A Directors, and (3) that the approval of the holders of the Class A Common Stock is required for (a) certain future authorizations or issuances of additional securities which have rights senior to Class A Common Stock, (b) certain alterations of rights or terms of the Class A or Class B Common Stock as set forth in the Articles of Organization of the Company, (c) other amendments of the Articles of Organization of the Company, (d) certain mergers or consolidations with, or acquisitions of, other entities, and (e) sales or dispositions of any significant portion of the Company’s assets.

Class B Common Stock

The Class B Common Stock has full voting rights, including the right to (1) elect a majority of the members of the Company’s Board of Directors and (2) approve all (a) amendments to the Company’s Articles of Organization, (b) mergers or consolidations with, or acquisitions of, other entities, (c) sales or dispositions of any significant portion of the Company’s assets, and (d) equity-based and other executive compensation and other significant corporate matters. The Company’s Class B Common Stock is not listed for trading. Each share of Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of any Class B holder, and participates equally in earnings.

All distributions with respect to the Company’s capital stock are restricted by the Company’s credit agreement, with the exception of distributions of capital stock from subsidiaries to The Boston Beer Company, Inc. and
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Boston Beer Corporation, repurchase from former employees of
non-vested
investment shares of Class A Common Stock issued under the Company’s equity incentive plan, redemption of certain shares of Class A Common Stock as approved by the Board of Directors and payment of cash dividends to its holders of common stock.

Employee Stock Compensation Plan

The Company’s Employee Equity Incentive Plan (the “Equity Plan”) currently provides for the grant of discretionary options, restricted stock awards and restricted stock awardsunits to employees, and provides for shares to be sold to employees of the Company at a discounted purchase price under its investment share program. The Equity Plan is administered by the Board of Directors of the Company, based on recommendations received from the Compensation Committee of the Board of Directors. The Compensation Committee consists of three independent directors. In determining the quantities and types of awards for grant, the Compensation Committee periodically reviews the objectives of the Company’s compensation system and takes into account the position and responsibilities of the employee being considered, the nature and value to the Company of his or her service and accomplishments, his or her present and potential contributions to the success of the Company, the value of the type of awards to the employee and such other factors as the Compensation Committee deems relevant.

Stock options and related vesting requirements and terms are granted at the Board of Directors’ discretion, but generally vest ratably over five-yearthree to five-year periods and, with respect to certain options granted to members of senior management, based on the Company’s performance. Generally, the maximum contractual term of stock options is ten years, although the Board of Directors may grant options that exceed the
ten-year
term. During fiscal 2016, 2015,years 2019, 2018, and 2014,2017, the Company granted options to purchase 786,450, 18,723, and 7,09026,507 shares, 27,490 shares, 5,185 shares, respectively, of its Class A Common Stock to employees at market price on the grant dates. Of the 2016 option grants, 574,507 shares relategranted in 2019, 14,680 shares related to a special long-term service-based retention stock option issued to the Chief Executive Officer, 173,135 shares relate to other special long-term service-based retentionperformance-based stock options and 38,80811,827 shares relaterelated to performance-basedservice-based stock options. Of
In December 2018, the 2015 option grants, 14,742 shares relateEmployee Equity Incentive Plan was amended to performance-based option grants and 3,981 relate to special long-term service-based retentionpermit the grant of restricted stock options. Of the 2014 option grants, all shares relate to performance-based option grants.

On January 1, 2017,units. Previously, the Company granted options to purchase an aggregate of 5,185 shares of the Company’s Class A Common Stock with a weighted average fair value of $81.95 per share, of which all shares relate to performance-basedrestricted stock options.

awards. Restricted stock awardsunits are also granted at the Board of Directors’ discretion. During fiscal 2016, 2015,years 2019, 2018, and 2014,2017, the Company granted 21,653, 6,092,22,509 shares, 83,561 shares, and 16,43215,800 shares, respectively, of restricted stock units or awards to certain senior managers and key employees, all of which are service-based and vest ratably over service periods of threeone to five years.

The Equity Plan also has an investment share program which permits employees who have been with the Company for at least one year to purchase shares of Class A Common Stock at a discount from current market

value of 0% to 40%, based on the employee’s tenure with the Company. Investment shares vest ratably over service periods of five years. Participants may pay for these shares either up front or through payroll deductions over an eleven-month period during the year of purchase. During fiscal 2016, 2015,years 2019, 2018, and 2014,2017, employees elected to purchase an aggregate of 9,199, 8,301, and 8,5167,901 investment shares, respectively.

On January 1, 2017, the Company granted 12,3589,214 investment shares, of restricted stock awards to certain senior managers and key employees of which all10,146 investment shares, vest ratably over service periods of five years. On January 1, 2017, employees elected to purchase 9,977 shares under the investment share program.

respectively.

The Company has reserved 6.7 million shares of Class A Common Stock for issuance pursuant to the Equity Plan, of which 0.71.1 million shares were available for grant as of December 31, 2016.28, 2019. Shares reserved for issuance under cancelled employee stock options and forfeited restricted stock are returned to the reserve under the Equity Plan for future grants or purchases. The Company also purchases unvested investment shares from employees who have left the Company at the lesser of (i) the price paid for the shares when the employee acquired the shares or (ii) the fair market value of the shares as of the date next preceding the date on which the shares are called for redemption by the Company. These shares are also returned to the reserve under the Equity Plan for future grants or purchases.

Non-Employee
Director Options

The Company has a stock option plan for
non-employee
directors of the Company (the
“Non-Employee
Director Plan”), pursuant to which each
non-employee
director of the Company is granted an option to purchase shares of
66
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the Company’s Class A Common Stock upon election or
re-election
to the Board of Directors. Stock options issued to
non-employee
directors vest upon grant and have a maximum contractual term of
ten years.years
. During fiscal 2016, 2015,years 2019, 2018, and 20142017 the Company granted options to purchase an aggregate of 14,040, 5,640,4,779 shares, 5,080 shares, and 6,69610,188 shares of the Company’s Class A Common Stock to
non-employee
directors, respectively.

The Company has reserved 0.6 million shares of Class A Common Stock for issuance pursuant to the
Non-Employee
Director Plan, of which 0.1 million shares were available for grant as of December 31, 2016. Cancelled28, 2019. Shares under any cancelled
non-employee
directors’ stock options or options that expire unexercised are returned to the reserve under the
Non-Employee
Director Plan for future grants.

Option Activity

Information related to stock options under the Equity Plan and the
Non-Employee
Director Plan is summarized as follows:

   Shares   Weighted-
Average
Exercise
Price		   Weighted-Average
Remaining
Contractual Term
in Years		   Aggregate
Intrinsic
Value
(in thousands)		 

Outstanding at December 26, 2015

   1,127,162    $63.99      

Granted

   800,490     197.56      

Forfeited

   (40,352)    196.86      

Expired

   (1,980)    241.79      

Exercised

   (537,087)    74.71      
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding at December 31, 2016

   1,348,233    $141.98     6.44    $61,632  
  

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable at December 31, 2016

   196,522    $86.52     4.14    $17,210  
  

 

 

   

 

 

   

 

 

   

 

 

 

Vested and expected to vest at December 31, 2016

   744,866    $97.34     4.39    $59,410  
  

 

 

   

 

 

   

 

 

   

 

 

 

 
Shares
  
Weighted-
Average
Exercise
Price
  
Weighted-Average

Remaining
Contractual Term
in Years
  
Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at December 29, 2018
  
366,829
  $
 155.75
       
Granted
  
31,286
   
313.56
       
Forfeited
  
—  
   
—  
       
Expired
  
—  
   
—  
       
Exercised
  
(82,437
)  
97.80
       
                 
Outstanding at December 28, 2019
  
315,678
  $
186.53
   
5.75
  $
  60,680
 
                 
Exercisable at December 28, 2019
  
93,113
  $
148.60
   
4.08
  $
21,430
 
                 
Vested and expected to vest at December 28, 2019
  
286,312
  $
184.83
   
5.67
  $
55,522
 
                 
Of the total options outstanding at December 31, 2016, 72,57328, 2019, 65,306 shares were performance-based options grantedfor which the performance criteria had yet to multiple key employeesbe achieved and 574,50740,607 shares were service-basedperformance-based options for which the performance criteria had been met but yet to be approved for vesting by the Board of Directors.
Stock Compensation to Chief Executive
Officer
On April 30, 2018, the Company granted to theits incoming Chief Executive Officer that are not expected to vest as a result of the planned retirement in 2018.

Stock Option Grants to Chief Executive Officer

On January 1, 2008, the Company granted the Chief Executive Officer anperformance-based stock option to purchase 753,8649,959 shares of its Class A Common Stock, which vests 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 Company’s Class A Common Stock cannot exceed $70 per share over the exercise price. At December 31, 2016 and December 26, 2015, 301,546 shares and 452,319 shares of the stock option remained outstanding, respectively. If the outstanding shares at December 31, 2016 were exercised on that date, the exercise price would have been $99.85 per share. If the outstanding shares at December 26, 2015 were exercised on that date, the exercise price would have been $135.40 per share. Reflected in the table above is the minimum exercise price of $37.65. The Company is accounting for this award aswith a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value of $100.50 per share, to be $8.41, and recorded stock-based compensation expense of $0.3, $0.5, and $0.7, million related to this option in the fiscal 2016, 2015, and 2014, respectively.

On January 1, 2016, the Company granted thewhich vests through 2022. The incoming Chief Executive Officer an option to purchase 574,507 shares of its Class A Common Stock, which vests overwas also granted 64,325 restricted stock awards with a five-year period, commencing on January 1, 2019, at the rate of 20% per year. The exercise price is determined by multiplying $201.91 by the aggregate percentage change in the DJ Wilshire 5000 Index from and after January 1, 2016 through the close of business on the trading date next preceding each date on which the option is exercised, plus an additional 1.5 percentage points per annum, prorated for partial years. The exercise price will not be less than $201.91 per share and the excess of theweighted-average fair value of the Company’s Class A Common Stock cannot exceed $150$229.30 per share over the exercise price. At December 31, 2016, the stock option remained unexercised as to 574,507 shares. If the stock option had been exercised on December 31, 2016, the exercise price would have been $226.72 per share. The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per share to be $39.16. As a resultwith service-based vesting through 2023.

67
Table of the Chief Executive Officer’s planned retirement in 2018, the Company estimated a 100% forfeiture rate related to this grant and in the fourth quarter of fiscal 2016 the Company reversed a total of $3.6 million in stock-based compensation expense that had been recorded during the first three quarters of fiscal 2016.

Contents

Stock-Based Compensation

The following table provides information regarding stock-based compensation expense included in operating expenses in the accompanying consolidated statements of comprehensive income:

   2016   2015   2014 
   (in thousands) 

Amounts included in advertising, promotional and selling expenses

  $2,507    $2,943    $3,342  

Amounts included in general and administrative expenses

   3,641     3,722     3,515  
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $6,148    $6,665    $6,857  
  

 

 

   

 

 

   

 

 

 

Amounts related to performance-based stock awards included in total stock-based compensation expense

  $203    $831    $1,378  
  

 

 

   

 

 

   

 

 

 

 
2019
 
 
2018
 
 
2017
 
 
(in thousands)
 
Amounts included in advertising, promotional and selling expenses
 $
 
3,996
  $
 
3,243
  $
 
2,868
 
Amounts included in general and administrative expenses
  
8,341
   
6,792
   
3,448
 
             
Total stock-based compensation expense
 $
12,337
  $
10,035
  $
6,316
 
             
Amounts related to performance-based stock awards included in total stock-based
compensation expense
 $
1,944
  $
1,750
  $
36
 
             
As permitted by ASC 718, the Company uses a lattice model, such as the binomialtrinomial option-pricing model, to estimate the fair values of stock options. The Company believes that the Black-Scholes option-pricing model is
less effective than the binomialtrinomial option-pricing model in valuing long-term options, as it assumes that volatility and interest rates are constant over the life of the option. In addition, the Company believes that the binomialtrinomial option-pricing model more accurately reflects the fair value of its stock awards, as it takes into account historical employee exercise patterns based on changes in the Company’s stock price and other relevant variables. The weighted-average fair value of stock options granted during 2016, 2015,in fiscal years 2019, 2018, and 20142017 was $87.70, $128.54,$
131.91
, $
92.89
, and $106.81 $
72.52
per share, respectively, as calculated using a binomialtrinomial option-pricing model. This excludes the January 1, 2016 stock options granted to the Chief Executive Officer with a weighted-average fair value of $39.16, as calculated using the Monte Carlo Simulation pricing model.

Weighted average assumptions used to estimate fair values of stock options on the date of grants are as follows:

   2016   2015   2014 

Expected volatility

   34.0%     34.2%     34.3%  

Risk-free interest rate

   2.16%     2.16%     2.83%  

Expected dividends

   0%     0%     0%  

Exercise factor

   2.68 times     3.0 times     3.4 times  

Discount for post-vesting restrictions

   0.0%     0.0%     0.0%  

 
2019
  
2018
  
2017
 
Expected volatility
  
32.1
%  
34.0
%  
36.2
%
Risk-free interest rate
  
2.63
%   
2.68
%   
2.30
%
Expected dividends
  
0
%   
0
%   
0
%
Exercise factor
  
2.33 times
   
2.52 times
   
3.63 times
 
Discount for post-vesting restrictions
  
0.0
%   
0.0
%   
0.0
%
Expected volatility is based on the Company’s historical realized volatility. The risk-free interest rate represents the implied yields available from the U.S. Treasury
zero-coupon
yield curve over the contractual term of the option when using the binomialtrinomial option-pricing model. Expected dividend yield is 0% because the Company has not paid dividends in the past and currently has no known intention to do so in the future. Exercise factor and discount for post-vesting restrictions are based on the Company’s historical experience.

Fair value of restricted stock awards is based on the Company’s traded stock price on the date of the grants. Fair value of investment shares is calculated using the binomialtrinomial option-pricing model.

The Company uses the straight-line attribution method in recognizing stock-based compensation expense for awards that vest based on service conditions. For awards that vest subject to performance conditions, compensation expense is recognized ratably for each tranche of the award over the performance period if it is probable that performance conditions will be met.

Under ASC 718,

The Company recognizes compensation expense, is recognized less estimated forfeitures. Because mostforfeitures of the Company’s equity awards vest on January 1st each year, the Company recognized stock-based compensation expense related to those awards, net of actual forfeitures. For equity awards that do not vest on January 1st, the estimated forfeiture rate used was 5.0%, with the exception of the Chief Executive Officer’s 2016 equity award which used a 100% forfeiture rate as a result of the planned retirement in 2018.11.0%. The forfeiture rate wasis based upon historical experience and the Company periodically reviews this rate to ensure proper projection of future forfeitures.

forfeitures
.
68
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The total fair value of options vested during 2016, 2015,fiscal years 2019, 2018, and 20142017 was $9.9$2.5 million, $4.1$3.2 million, and $3.8$2.9 million, respectively. The aggregate intrinsic value of stock options exercised during 2016, 2015,fiscal years 2019, 2018, and 20142017 was $52.7$20.9 million, $37.7$19.2 million, and $45.8$14.9 million, respectively.

Based on equity awards outstanding as of December 31, 2016,28, 2019, there is $23.0$24.8 million of unrecognized compensation costs, net of estimated forfeitures, related to unvested share-based compensation arrangements that are expected to vest. Such costs are expected to be recognized over a weighted-average period of 3.092.0 years. The following table summarizes the estimated future annual stock-based compensation expense related to share-based arrangements existing as of December 31, 2016
Decemb
er 28, 2019 that are expectedex
pected
 to vest (in thousands):

2017

  $5,707  

2018

   5,253  

2019

   3,952  

2020

   2,606  

2021

   2,060  

Thereafter

   3,422  
  

 

 

 

Total

  $23,000  
  

 

 

 

2020
 $
  10,231
 
2021
  
7,529
 
2022
  
5,000
 
2023
  
1,731
 
2024
  
334
 
     
Total
 $
24,825
 
     
Non-Vested
Shares
Activity

The following table summarizes vesting activities of shares issued under the investment share program and restricted stock awards:

   Number of
Shares		   Weighted
Average Fair
Value		 

Non-vested at December 26, 2015

   60,922    $150.03  

Granted

   30,852     161.84  

Vested

   (19,740)    114.12  

Forfeited

   (7,066)    152.40  
  

 

 

   

Non-vested at December 31, 2016

   64,968    $166.29  
  

 

 

   

19,740

         
 
Number
 
of
Shares
  
Weighted
Average
 
Fair
Value
 
Non-vested
at December 29, 2018
  
126,720
  $
  192.74
 
Granted
  
30,410
   
269.91
 
Vested
  
(33,205
)  
188.63
 
Forfeited
  
(1,783
)  
161.42
 
         
Non-vested
at December 28, 2019
  
122,142
  $
213.52
 
         
33,205 shares vested in 20162019 with a weighted average fair value of $114.12. 25,732$188.63. 20,678 shares vested in 20152018 with a weighted average fair value of $79.44. 38,329$156.50. 22,213 shares vested in 20142017 with a weighted average fair value of $53.82.

$151.32.

Stock Repurchase Program

In 1998, the Board of Directors authorized management to implement a stock repurchase program. As of December 31, 2016,28, 2019, the Company has repurchased a cumulative total of approximately 12.513.8 million shares of its Class A Common Stock for an aggregate purchase price of approximately $607.8$840.7 million as follows:

   Number of
Shares		   Aggregate Purchase
Price		 
       (in thousands) 

Repurchased at December 28, 2013

   10,892,459    $299,528  

2014 repurchases

   29,474     7,859  
  

 

 

   

 

 

 

Repurchased at December 27, 2014

   10,921,933     307,387  

2015 repurchases

   616,747     138,705  
  

 

 

   

 

 

 

Repurchased at December 26, 2015

   11,538,680     446,092  

2016 repurchases

   944,876     161,658  
  

 

 

   

 

 

 

Repurchased at December 31, 2016

   12,483,556    $607,750  
  

 

 

   

 

 

 

M. Employee Retirement Plans and Post-Retirement Medical Benefits

         
 
Number of
Shares
  
Aggregate
Purchase
 
Price
 
   
(in thousands)
 
Repurchased at December 31, 2016
  
12,483,556
  $
  607,750
 
2017 repurchases
  
963,790
   
144,602
 
         
Repurchased at December 30, 2017
  
13,447,346
   
752,352
 
2018 repurchases
  
349,691
   
88,312
 
         
Repurchased at December 29, 2018
  
13,797,037
   
840,664
 
         
2019 repurchases
  
—  
   
—  
 
         
Repurchased at December 28, 2019
  
13,797,037
  $
840,664
 
         
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Table of Contents
O.
Employee Retirement Plans and Post-Retirement Medical
Benefits
The Company has one1 retirement plan covering substantially allnon-union employees; two2 other retirement plans, one of which covers substantially all union employees, and the other of which covers employees of a specific union; and post-retirement medical benefits covering substantially all union employees.

Non-Union
Plans

The Boston Beer Company 401(k) Plan (the “Boston Beer 401(k) Plan”), which was established by the Company in 1993, is a Company-sponsored defined contribution plan that covers a majority of the Company’s
non-union
employees who are employed by Boston Beer Corporation, American Craft Brewery LLC, A & S Brewing Collaborative LLC, or Angry Orchard Cider Company, LLC. All
non-union
employees of these entities are eligible to participate in the Plan immediately upon employment. Participants may make voluntary contributions
up to 60% of their annual compensation, subject to IRS limitations. The Company matches each participant’s contribution. A maximum of 6% of compensation is taken into account in determining the amount of the match. The Company matches 100% of the first $1,000 of the eligible compensation participants contribute. Thereafter, the Company matches 50% of the eligible contribution. The Company’s contributions to the Boston Beer 401(k) Plan amounted to $4.0 million, $3.5 million, and $3.0$3.2 million in fiscal years 20162019, 2018, and 2015,2017, respectively. The basic annual administrative fee for the Boston Beer 401(k) Plan is paid by the Plan’s investment fund revenue. In addition, per the Service Provider Payment Agreement, a credit up to a maximum of two basis points multiplied by the total amount of assets under the Plan per year is available for paying eligible Plan expenses. Participant forfeitures are also available for paying eligible Plan expenses. The Company is responsible for the payment of any additional fees related to the management of the Boston Beer 401(k) Plan. Such fees are not material to the Company.

In January 2020, the Company amended the Boston Beer 401(k) Plan to update the Company match as follows: 100% of the first 3% of the eligible compensation participants contribute. Thereafter, the Company matches 50% of the eligible contribution, up to a maximum of 5%.

As part of the Dogfish Head Transaction, the Company acquired The Dogfish Head 401(k) Plan (the “Dogfish Head 401(k) Plan”), which is a Company-sponsored defined contribution plan that is available to all Dogfish Head employees. Participants may make voluntary contributions up to 60% of their annual compensation, subject to IRS limitations. The Company matches each participant’s contribution. A maximum of 5% of compensation is taken into account in determining the amount of the match. The Company matches 100% of the first 3% of the eligible compensation participants contribute. Thereafter, the Company matches 50% of the eligible contribution. The Company’s contributions to the Dogfish Head 401(k) Plan amounted to $0.3
million in fiscal year 2019. In January 2020, the Dogfish Head 401(k) Plan merged with the Boston Beer 401(k) Plan.
Union Plans

The Samuel Adams Cincinnati Brewery 401(k) Plan for Represented Employees (the “SACB 401(k) Plan”) is a Company-sponsored defined contribution plan. It was established in 1997 and is available to all union employees upon commencement of employment or, if later, attaining age 21. Participants may make voluntary contributions up to 60% of their annual compensation to the SACB 401(k) Plan, subject to IRS limitations. Company contributions for fiscal 2016years 2019 and 20152018 were insignificant. The basic annual administrative fee for the SACB 401(k) Plan is paid by the Plan’s investment fund revenue. In addition, per the Service Provider Payment Agreement, a credit up to a maximum of two basis points multiplied by the total amount of assets under the Plan per year, excluding participant loans, is available for paying eligible Plan expenses. The Company is responsible for the payment of any additional fees related to the management of the SACB 401(k) Plan. Such fees are not material to the Company.

The Samuel Adams Brewery Company, Ltd. Local Union No. 1199 Pension Plan (the “Local 1199 Pension Plan”) is a Company-sponsored defined benefit pension plan. It was established in 1991 and is open to all union employees who are covered by the Company’s collective bargaining agreement with Teamsters Local Union
7
0
Table of Contents
No. 1199 (“Local Union #1199”1199”), or persons on leave from the Company who are employed by Local Union #1199,1199, and in either case who have completed 12 consecutive months of employment with at least 750 hours worked. worked
.
The defined benefit is determined based on years of service since July 1991. The Company made contributions of $219,000 $
314,000
, $
315,000
and $188,000 $
238,000
in 2016fiscal years 2019, 2018 and 20152017, respectively. At December 31, 201628, 2019 and December 26, 2015,29, 2018, the unfunded projected pension benefits were $1.9$
2.7
 million and $1.6$
2.0
 million, respectively.

The Company provides a supplement to eligible retirees from Local #1,1, Local #20,20, and Local Union #11991199 to assist them with the cost of Medicare gap coverage after their retirement on account of age or permanent disability. To qualify for this benefit (collectively, the “Retiree Medical Plan”), an employee must have worked for at least 20 years for the Company or its predecessor at the Company’s Cincinnati Brewery, must have been enrolled in the Company’s group medical insurance plan for at least 5 years before retirement and, in the case of retirees from
Local #20,20, for at least 7 of the last 10 years of their employment, and must be eligible for Medicare benefits under the Social Security Act. The accumulated post-retirement benefit obligation was determined using a discount rate of 4.25%3.32% at December 31, 201628, 2019 and 4.5%4.27% at December 26, 201529, 2018 and a 2.5% health care cost

increase based on the Cincinnati Consumer Price Index for the years 2016, 2015,2019, 2018, and 2014.2017. The effect of a 1% point increase and the effect of a 1% point decrease in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic post-retirement health care benefit costs and on the accumulated post-retirement benefit obligation for health care benefits would not be significant.

In addition, the comprehensive medical plan offered to currently employed members of Local #2020 remains available to them should they retire after reaching age 57, and before reaching age 65, with at least 20 years of service with the Company or its predecessor at the Company’s Cincinnati Brewery. These eligible retirees may choose to continue to be covered under the Company’s comprehensive group medical plan until they reach the age when they are eligible for Medicare health benefits under the Social Security Act or coverage under a comparable State health benefit plan. Eligible retirees pay 100% of the cost of the coverage.

The funded status of the Local 1199 Pension Plan and the Retiree Medical Plan are as follows:

   Local 1199 Pension Plan   Retiree Medical Plan 
   December 31,   December 26,   December 31,   December 26, 
   2016   2015   2016   2015 
   (in thousands) 

Fair value of plan assets at end of fiscal year

  $2,733    $2,471    $—      $—    

Benefit obligation at end of fiscal year

   4,611     4,105     708     671  
  

 

 

   

 

 

   

 

 

   

 

 

 

Unfunded Status

  $(1,878)   $(1,634)   $(708)   $(671) 
  

 

 

   

 

 

   

 

 

   

 

 

 

The

                 
 
Local 1199 Pension Plan
  
Retiree Medical Plan
 
 
December 28,
2019
  
December 29,
2018
  
December 28,
2019
  
December 29,
2018
 
 
(in thousands)
 
Fair value of plan assets at end of fiscal year
 $
  3,946
  $
  3,322
  $
  —  
  $
  —  
 
Benefit obligation at end of fiscal year
  
6,680
   
5,357
   
888
   
731
 
                 
Unfunded Status
 $
  (2,734
) $
  (2,035
) $
  (888
) $
  (731
)
                 
On April 21, 2019, the Company reached an agreement with the Local Union 1199 to terminate the Local Union No. 1199 Pension Plan effective January 1, 2020 through either lump sum payments or the purchase of third
-
party annuities. In the fourth quarter of 2020 the Company expects to complete the termination of the plan and estimates an expense of approximately $1.9 million will be recorded as a result of the termination.
Prior to the agreement with the Local 1199 Union to terminate the pension plan, the Local 1199 Pension Plan investsinvested in a family of funds designed to minimize excessive short-term risk and focus on consistent, competitive long-term performance, consistent with the funds’ investment objectives. The fund-specific objectives vary and include maximizing long-term returns both before and after taxes, maximizing total return from capital appreciation plus income, and investing in funds that invest in common stock of companies that cover a broad range of industries. The Local 1199 Plan’s investments are considered category 1 assets in the fair value hierarchy and the fair values were determined by reference to
period-end
quoted market prices.

The

As a result of the Local 1199 Pension Plan termination, the basis of the long-term rate of return assumption of 6.5%1.75% reflects the Local 1199
Plan’s
current targeted asset mixallocation of approximately 35% debt securities and 65% equity securities with assumed average annual returns100% of approximately 3% to 6% for debt securities and 8% to 12% for equity securities. It is assumed that the Local 1199 Pension Plan’s investment portfolio will be adjusted periodically to maintain the targeted ratiosassets
invested
71
Table of debt securities and equity securities. Additional consideration is given to the Local 1199 Plan’s historical returns as well as future long-range projections of investment returns for each asset category.Contents
in money market funds. The assumed discount rate in estimating the pension obligation was 4.25%3.32% and 4.50%4.27% at December 31, 201628, 2019 and December 26, 2015,29, 2018, respectively.

The Local 1199 Plan’s weighted-averageweighted
-
average asset allocations at the measurement dates by asset category are as follows:

Asset Category

  December 31,
2016		  December 26,
2015		 

Equity securities

   66%   67% 

Debt securities

   34%   33% 
  

 

 

  

 

 

 

Total

   100%   100% 
  

 

 

  

 

 

 

N. Net Income per Share

         
Asset Category
 
December 28,
2019
  
December 29,
2018
 
Cash equivalents
  
100
%  
0
%
Equity securities
  
0
%  
61
%
Debt securities
  
0
%  
39
%
         
Total
  
100
%  
100
%
         
P.
Net Income per Share
Net Income per Common Share —
-
 Basic

The following table sets forth the computation of basic net income per share using the
two-class
method:

   December 31,
2016 (53
weeks)		   December 26,
2015		   December 27,
2014		 
   (in thousands, except per share data) 

Net Income

  $87,349    $98,414    $90,743  
  

 

 

   

 

 

   

 

 

 

Allocation of net income for basic:

      

Class A Common Stock

  $63,717    $71,798    $64,027  

Class B Common Stock

   23,190     26,154     26,207  

Unvested participating shares

   442     462     509  
  

 

 

   

 

 

   

 

 

 
  $87,349    $98,414    $90,743  

Weighted average number of shares for basic:

      

Class A Common Stock

   9,189     9,619     9,202  

Class B Common Stock*

   3,344     3,504     3,766  

Unvested participating shares

   64     62     73  
  

 

 

   

 

 

   

 

 

 
   12,597     13,185     13,041  

Net income per share for basic:

      

Class A Common Stock

  $6.93    $7.46    $6.96  
  

 

 

   

 

 

   

 

 

 

Class B Common Stock

  $6.93    $7.46    $6.96  
  

 

 

   

 

 

   

 

 

 

             
 
December 28,
2019
  
December 29,
2018
  
December 30,
2017
 
 
(in thousands, except per share data)
 
Net Income
 $
  110,041
  $
  92,663
  $
  99,049
 
             
Allocation of net income for basic:
         
Class A Common Stock
 $
82,474
  $
68,080
  $
73,114
 
Class B Common Stock
  
26,600
   
23,710
   
25,391
 
Unvested participating shares
  
967
   
873
   
544
 
             
 $
110,041
  $
92,663
  $
99,049
 
Weighted average number of shares for basic:
         
Class A Common Stock
  
8,908
   
8,620
   
8,933
 
Class B Common Stock*
  
2,873
   
3,002
   
3,102
 
Unvested participating shares
  
105
   
111
   
67
 
             
  
11,886
   
11,733
   
12,102
 
Net income per share for basic:
         
Class A Common Stock
 $
9.26
  $
7.90
  $
8.18
 
             
Class B Common Stock
 $
9.26
  $
7.90
  $
8.18
 
             
*Change in Class B Common Stock resulted from the conversion of 150,000
100,000
shares to Class A Common Stock on May 6, 2015, 100,000 March 7, 2017,
79,000
shares to Class A Common Stock on October 26, 2015, 125,000 31, 2017,
100,000
shares to Class A Common Stock on November 4, 2016 and 45,000 1, 2018,
100,000
shares to Class A Common Stockstock on November 30, 2016,August 8, 2019 and
145,000
shares to Class A Common stock on December 13, 2019 with the ending number of shares reflecting the weighted average for the period.

Net Income per Common Share —
-
 Diluted

The Company calculates diluted net income per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the
two-class
method, which assumes the participating securities are not exercised or converted.

72
Table of Contents
The following tables set forth the computation of diluted net income per share, assuming the conversion of all Class B Common Stock into Class A Common Stock and using the
two-class
method for unvested participating shares:

   Fifty-three weeks ended December 31, 2016 
   Earnings to
Common
Shareholders		   Common Shares   EPS 
   (in thousands, except per share data)     

As reported — basic

  $63,717     9,189    $6.93  

Add: effect of dilutive potential common shares Share-based awards

   —       263    

Class B Common Stock

   23,190     3,344    

Net effect of unvested participating shares

   9      
  

 

 

   

 

 

   

Net income per common share — diluted

  $86,916     12,796    $6.79  
  

 

 

   

 

 

   

   Fifty-two weeks ended December 26, 2015 
   Earnings to
Common
Shareholders		   Common Shares   EPS 
   (in thousands, except per share data)     

As reported — basic

  $71,798     9,619    $7.46  

Add: effect of dilutive potential common shares Share-based awards

   —       397    

Class B Common Stock

   26,154     3,504    

Net effect of unvested participating shares

   14      
  

 

 

   

 

 

   

Net income per common share — diluted

  $97,966     13,520    $7.25  
  

 

 

   

 

 

   
   Fifty-two weeks ended December 27, 2014 
   Earnings to
Common
Shareholders		   Common Shares   EPS 
   (in thousands, except per share data)     

As reported — basic

  $64,027     9,202    $6.96  

Add: effect of dilutive potential common shares Share-based awards

   —       516    

Class B Common Stock

   26,207     3,766    

Net effect of unvested participating shares

   19     —      
  

 

 

   

 

 

   

Net income per common share — diluted

  $90,253     13,484    $6.69  
  

 

 

   

 

 

   

             
 
Fifty-two
weeks ended December 28, 2019
 
 
Earnings to
Common
Shareholders
  
Common
 
Shares
  
EPS
 
 
 
(in thousands, except per
 
share data)
 
 
 
 
 
As reported
-
 basic
 $
82,474
   
8,908
  $
 
9.26
 
Add: effect of dilutive potential common shares           
Share-based awards
  
—  
   
127
    
Class B Common Stock
  
26,600
   
2,873
    
Net effect of unvested participating shares
  
10
   
—  
    
Net income per common share
-
 diluted
 $
109,084
   
11,908
   
9.16
 
    
 
Fifty-two
weeks ended December 29, 2018
 
 
Earnings to
Common
Shareholders
  
Common Shares
  
EPS
 
 
 
(in thousands, except per
 
share data)
 
 
 
 
 
As reported
-
basic
 $
68,080
   
8,620
  $
7.90
 
Add: effect of dilutive potential c
o
mmon shares
 
 
 
 
 
 
 
 
 
 
 
Share-based awards
  
—  
   
112
    
Class B Common Stock
  
23,710
   
3,002
    
Net effect of unvested participating shares
  
8
   
—  
    
Net income per common share
-
diluted
 $
91,798
   
11,734
  
$
 
7.82
 
    
 
Fifty-two
weeks ended December 30, 2017
 
 
Earnings to
Common
Shareholders
  
Common Shares
  
EPS
 
 
 
(in thousands, except per
 
share data)
 
 
 
 
 
As reported
-
basic
 $
73,114
   
8,933
  $
8.18
 
Add: effect of dilutive potential common shares           
Share-based awards
  
—  
   
145
    
Class B Common Stock
  
25,391
   
3,102
    
Net effect of unvested participating shares
  
7
   
—  
    
Net income per common share
-
diluted
 $
98,512
   
12,180
  $
8.09
 
Basic net income per common share for each share of Class A Common
Com
m
on
Stock and Class B Common Stock is $6.93, $7.46,$9.26, $7.90, and $6.96$8.18 for the fiscal years 2016, 2015,2019, 2018, and 2014,2017, 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 aone-for-one
1-for-one
basis at the option of the stockholder.

Weighted average stock options to purchase 712,000, 16,000,23,000, 100,000, and 11,000785,000 shares of Class A Common Stock were outstanding during fiscal 2016, 2015,2019, 2018, and 2014,2017, respectively, but not included in computing diluted income per share because their effects were anti-dilutive. Additionally, performance-based stock options to purchase 35,000, 15,000,10,000, 10,000, and 30,00036,000 shares of Class A Common Stock were outstanding during fiscal 2016, 2015,2019, 2018, and 2014,
73
Table of Contents
2017,
respectively
, but not included in computing dilutive income per share because the performance criteria of these stock options were not met as of December 31, 2016,28, 2019, December 26, 2015,29, 2018, and December 27, 2014,30, 2017, respectively.

O. Accumulated Other Comprehensive (Loss) Income

Q.
Accumulated Other Comprehensive
Loss
Accumulated other comprehensive (loss) incomeloss represents amounts of unrecognized actuarial gains or losses related to the Company sponsored defined benefit pension plan and post-retirement medical plan, net of tax effect, and cumulative currency translation adjustments. Changes in accumulated other comprehensive loss represent actuarial losses or gains, net of tax effect, recognized as components of net periodic benefit costs and currency translation adjustments.adjustments due to tax rate changes in the period. The following table details the changes in accumulated other comprehensive (loss) incomeloss for 2016, 2015,2019, 2018, and 20142017 (in thousands):

   Accumulated Other
Comprehensive (Loss)
Income		 

Balance at December 28, 2013

  $(417) 

Deferred pension and other post-retirement benefit costs, net of taxes of $466

   (734) 

Amortization of Deferred benefit costs, net of tax of ($11)

   18  
  

 

 

 

Balance at December 27, 2014

  $(1,133) 
  

 

 

 

Deferred pension and other post-retirement benefit costs, net of taxes of ($99)

   130  

Amortization of Deferred benefit costs, net of tax of ($43)

   74  

Currency translation adjustment

   (22) 
  

 

 

 

Balance at December 26, 2015

  $(951) 
  

 

 

 

Deferred pension and other post-retirement benefit costs, net of taxes of ($69)

   122  

Amortization of Deferred benefit costs, net of tax of $101

   (175) 

Currency translation adjustment

   (99) 
  

 

 

 

Balance at December 31, 2016

  $(1,103) 
  

 

 

 

P. Valuation and Qualifying Accounts

Accumulated Other
Comprehensive (Loss)
Income
Balance at December 31, 2016
$
  (1,103
)
Deferred pension and other post-retirement benefit costs, net of tax benefit of $57
(170
)
Amortization of Deferred benefit costs, net of tax benefit of $11
(32
)
Currency translation adjustment
17
Balance at December 30, 2017
$
  (1,288
)
Deferred pension and other post-retirement benefit costs, net of taxes of $64
191
Amortization of Deferred benefit costs, net of taxes of $29
86
One time effect of adoption of ASU
2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(211
)
Currency translation adjustment
25
Balance at December 29, 2018
$
  (1,197
)
Deferred pension and other post-retirement benefit costs, net of taxes of $150
(442
)
Amortization of Deferred benefit costs, net of taxes of $26
(77
)
Currency translation adjustment
47
Balance at December 28, 2019
$
  (1,669
)
74
Table of Contents
R.
Valuation and Qualifying Accounts
The Company maintains reserves against accounts receivable for doubtful accounts and inventory for obsolete and slow-moving inventory. The Company also maintains reserves against accounts receivable for distributor promotional allowances. In addition, the Company maintains a reserve for estimated returns of stale beer, which is included in accrued expenses.

Allowance for Doubtful Accounts  Balance at
Beginning of
Period		   Net Provision
(Recovery)		   Amounts
Charged Against
Reserves		   Balance at
End of Period		 
   (In thousands) 

2016

  $244    $(244)   $—      $—    

2015

  $144    $165    $(65)   $244  

2014

  $160    $(16)   $—      $144  
Discount Accrual  Balance at
Beginning of
Period		   Net Provision
(Recovery)		   Amounts
Charged Against
Reserves		   Balance at
End of Period		 
   (In thousands) 

2016

  $2,813    $33,157    $(32,892)   $3,078  

2015

  $3,006    $33,204    $(33,397)   $2,813  

2014

  $2,602    $28,448    $(28,044)   $3,006  

Inventory Obsolescence Reserve  Balance at
Beginning of
Period		   Net Provision
(Recovery)		   Amounts
Charged Against
Reserves		   Balance at
End of Period		 
   (In thousands) 

2016

  $1,525   $4,707   $(3,970)   $2,262 

2015

  $1,328   $4,045   $(3,848)   $1,525 

2014

  $1,616   $6,130   $(6,418)   $1,328 
Stale Beer Reserve  Balance at
Beginning of
Period		   Net Provision
(Recovery)		   Amounts
Charged Against
Reserves		   Balance at
End of Period		 
   (In thousands) 

2016

  $3,254   $10,466   $(8,494)   $5,226 

2015

  $2,422   $7,780   $(6,948)   $3,254 

2014

  $1,754   $5,648   $(4,980)   $2,422 

Q. Subsequent Events

As disclosed

                 
Allowance for Doubtful Accounts
 
Balance at
Beginning
 
of
Period
 
 
Net Provision
(Recovery)
 
 
Amounts
Charged Against
Reserves
 
 
Balance at
End of
 
Period
 
 
(In thousands)
 
2019
 $
2
  $
45
  $
  0
  $
47
 
2018
 $
—  
  $
2
  $
  —  
  $
2
 
2017
 $
—  
  $
—  
  $
—  
  $
—  
 
             
Discount Accrual
 
Balance
 
at
Beginning
 
of
Period
 
 
Net
 
Provision
(Recovery) *
 
 
Amounts
Charged
 
Against
Reserves
 
 
Balance at
End of
 
Period
 
 
(In thousands)
 
2019
 $
  4,636
  $
  43,920
  $
  (42,284
) $
  6,272
 
2018
 $
3,072
  $
36,213
  $
  (34,649
) $
4,636
 
2017
 $
3,078
  $
30,171
  $
  (30,177
) $
3,072
 
             
Inventory Obsolescence Reserve
 
Balance at
Beginning
 
of
Period
 
 
Net Provision
(Recovery)
 
 
Amounts
Charged
 
Against
Reserves
 
 
Balance at
End of
 
Period
 
 
(In thousands)
 
2019
 $
2,580
  $
8,092
  $
(4,297
) $
6,375
 
2018
 $
1,826
  $
4,175
  $
(3,421
) $
2,580
 
2017
 $
2,262
  $
5,751
  $
(6,187
) $
1,826
 
             
Stale Beer Reserve
 
Balance at
Beginning
 
of
Period
 
 
Net Provision
(Recovery)
 
 
Amounts
Charged Against
Reserves
 
 
Balance at
End of
 
Period
 
 
(In thousands)
 
2019
 $
2,146
  $
4,406
  $
(4,724
) $
1,828
 
2018
 $
3,023
  $
2,691
  $
(3,568
) $
2,146
 
2017
 $
5,226
  $
5,449
  $
(7,652
) $
3,023
 
*2018 net provision of the discount accrual includes $1.7 million related to the cumulative effect adjustment to retained earnings and the current year adjustment to deferred revenue related to the adoption of ASU
2014-09.
S.
Related Party Transactions
The Company has entered a lease with the Dogfish Head founders and other owners of buildings used in Note L, on January 1, 2017certain of the Company’s restaurant operations. The lease is for ten years with renewal options. The total payments due under the initial ten year term is $3.6 million. Total related party expense recognized for fiscal 2019 was approximately $183,000.
In addition, for fiscal 2019, the Company granted stock options and restricted stock awards and employees electedincurred expenses of less than $30,000 to purchase shares under the investment share purchase program.

As disclosed in Form8-K filedvarious other suppliers affiliated with the SEC on February 6, 2017, the Company announcement the planned retirement of its Chief Executive Officer expected in 2018.

Dogfish Head founders.

T.
Subsequent Events
The Company evaluated subsequent events occurring after the balance sheet date, December 31, 2016,28, 2019, and concluded that there waswere no eventevents of which management was aware that occurred after the balance sheet date that would require any adjustment to or disclosure in the accompanying consolidated financial statements.

R. Quarterly Results (Unaudited)

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Table of Contents
U.
Quarterly Results (Unaudited)
The Company’s fiscal quarters are consistently determined year to year and generally consist of 13 weeks, except in those fiscal years in which there are fifty-three weeks where the last fiscal quarters then consist of 14 weeks. In management’s opinion, the following unaudited information includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future quarters.

  For Quarters Ended 
  December 31,
2016 (1)		  September 24,
2016		  June 25,
2016		  March 26,
2016		  December 26,
2015		  September 26,
2015		  June 27,
2015		  March 28,
2015		 
  (14 weeks)  (13 weeks)  (13 weeks)  (13 weeks)  (13 weeks)  (13 weeks)  (13 weeks)  (13 weeks) 
  (In thousands, except per share data) 

Net revenue

 $219,370  $253,433  $244,816  $188,827  $215,133  $293,094  $252,204  $199,503 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  107,656   133,607   126,876   91,531   108,767   157,010   136,225   99,615 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

  34,325   50,309   41,788   11,237   26,338   60,879   46,819   22,138 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

 $22,166  $31,530  $26,621  $7,032  $16,115  $38,624  $29,932  $13,743 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per share — basic

 $1.77  $2.53  $2.11  $0.55  $1.25  $2.93  $2.24  $1.04 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per share — diluted

 $1.75  $2.48  $2.06  $0.53  $1.21  $2.85  $2.18  $1.00 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

quarters
.
                                 
 
For Quarters Ended
 
 
December 28,
2019 (2)
  
September 28,
2019 (2)
  
June 29,
2019 (2)
  
March 30,
2019
  
December 29,
2018
  
September 29,
2018 (1)
  
June 30,
2018
  
March 31,
2018
 
 
(13 weeks)
  
(13 weeks)
  
(13 weeks)
  
(13 weeks)
  
(13 weeks)
  
(13 weeks)
  
(13 weeks)
  
(13 weeks)
 
 
(In thousands, except per share data)
 
Net revenue
 $
  301,300
  $
  378,466
  $
 
  318,407
  $
 
  251,651
  $
  225,222
  $
  306,870
  $
 
  273,100
  $
 
  190,457
 
                                 
Gross profit
  
142,789
   
187,835
   
159,002
   
124,540
   
116,949
   
157,227
   
141,970
   
96,097
 
                                 
Operating income
  
17,702
   
59,836
   
37,932
   
29,443
   
28,851
   
46,728
   
31,064
   
9,238
 
                                 
Net income
 $
13,762
  $
44,729
  $
27,856
  $
23,694
  $
21,811
  $
38,007
  $
23,535
  $
9,310
 
                                 
Net income per share – basic
 $
1.13
  $
3.70
  $
2.39
  $
2.04
  $
1.88
  $
3.25
  $
1.99
  $
0.79
 
                                 
Net income per share – diluted
 $
1.12
  $
3.65
  $
2.36
  $
2.02
  $
1.86
  $
3.21
  $
1.98
  $
0.78
 
                                 
(1)During the fourththird quarter of 2016,2018, the Company recorded a $3.6$4.5 million decreasetax benefit related to tax accounting method changes.
(2)During the second, third and
fourth
quarter of 2019, the Company recorded $1.9 million, $5.9 million and $2.1 million in stock-based compensation expense
non-reoccurring
transaction fees related to the planned retirement of the Company’s Chief Executive Officer in 2018.Dogfish Head Transaction, respectively.

76
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A.
Controls and Procedures

(a) Evaluation of disclosure controls and procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in alerting them in a timely manner to material information required to be disclosed in the Company’s reports filed with or submitted to the SEC.

(b) Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules
 13a-15(f).
The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.28, 2019. As described in Item 1 and in Note C of the Notes to Consolidated Financial Statements, we completed the Dogfish Head Brewery Transaction in July 2019. As permitted by the rules and regulations of the SEC, we excluded from our assessment the internal control over financial reporting at Dogfish Head Brewery, whose financial statements reflect total assets and net revenues constituting approximately 12% and 4%, respectively, of the consolidated financial statement amounts as of and for the year ended December 28, 2019. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Control—Integrated Framework (2013 framework)
. Based on its assessment, the Company believes that, as of December 31, 2016,28, 2019, the Company’s internal control over financial reporting is effective based on those criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 201628, 2019 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and Board of Directors and Stockholders of
The Boston Beer Company, Inc.

Boston, Massachusetts

Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Boston Beer Company, Inc. and subsidiaries (the “Company”), as of December 31, 2016,28, 2019, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 28, 2019, of the Company and our report dated February 19, 2020 expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s adoption of FASB Accounting Standards Update
2016-02,
Leases (Topic 842)
on December 30, 2018.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Dogfish Head Brewery, which was acquired on July 3, 2019, and whose financial statements constitute 12% of total assets and 4% of net revenues of the consolidated financial statement amounts as of and for the year ended December 28, 2019. Accordingly, our audit did not include the internal control over financial reporting at Dogfish Head Brewery.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
78
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with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as

/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 19, 2020
79
Table of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report dated February 22, 2017 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 22, 2017

Contents

(c) Changes in internal control over financial reporting

No changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 201628, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As set forth above, we excluded from our assessment the internal control over financial reporting at Dogfish Head Brewery for the year ended December 28, 2019. We consider Dogfish Head material to our results of operations, financial position and cash flows, and we are in the process of integrating the internal control procedures of Dogfish Head into our internal control structure.
Item 9B.
Other Information

None.

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PART III.

Item 10.Directors, Executive Officers and Corporate Governance

In December 2002, the Board of Directors of the Company adopted a (i) Code of Business Conduct and Ethics that applies to its Chief Executive Officer and its Chief Financial Officer, and (ii) Corporate Governance Guidelines. The Code of Business Conduct and Ethics was amended effective August 1, 2007 to provide for a third-party whistleblower hotline. These, as well as the charters of each of the Board Committees, are posted on the Company’s investor relations website,
www.bostonbeer.com
, and are available in print to any shareholder who requests them. Such requests should be directed to the Investor Relations Department, The Boston Beer Company, Inc., One Design Center Place, Suite 850, Boston, MA 02210. The Company intends to disclose any amendment to, or waiver from, a provision of its code of ethics that applies to the Company’s Chief Executive Officer or Chief Financial Officer and that relates to any element of the Code of Ethics definition enumerated in Item 406 of Regulation
S-K
by posting such information on the Company’s website.

The information required by Item 10 is hereby incorporated by reference from the registrant’s definitive Proxy Statement for the 20172020 Annual Meeting to be held on May 18, 2017.

14, 2020.
Item 11.Executive Compensation

The Information required by Item 11 is hereby incorporated by reference from the registrant’s definitive Proxy Statement for the 20172020 Annual Meeting to be held on May 18, 2017.

14, 2020.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership

The information required by Item 12 with respect to security ownership of certain beneficial owners and management is hereby incorporated by reference from the registrant’s definitive Proxy Statement for the 20172020 Annual Meeting to be held on May 18, 2017.

14, 2020.

Related Stockholder Matters

EQUITY COMPENSATION PLAN INFORMATION

Plan Category

  Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights		   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights		   Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans		 

Equity Compensation Plans Approved by Security Holders

   1,348,233    $141.98     753,160  

Equity Compensation Plans Not Approved by Security Holders

   N/A     N/A     N/A  
  

 

 

     

 

 

 

Total

   1,348,233    $141.98     753,160  
  

 

 

     

 

 

 

             
Plan Category
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
  
Weighted-Average

Exercise Price of
Outstanding Options,
Warrants and Rights
  
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
 
Equity Compensation Plans Approved by Security Holders
  
315,678
  $
 186.53
   
1,170,632
 
Equity Compensation Plans Not Approved by Security Holders
  
N/A
   
N/A
   
N/A
 
             
Total
  
315,678
  $
 186.53
   
1,170,632
 
             
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Table of Contents
Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is hereby incorporated by reference from the registrant’s definitive Proxy Statement for the 20172020 Annual Meeting to be held on May 18, 2017.

14, 2020.
Item 14.Principal AccountantAccounting Fees and Services

The information required by Item 14 is hereby incorporated by reference from the registrant’s definitive Proxy Statement for the 20172020 Annual Meeting to be held on May 18, 2017.

14, 2020.

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Table of Contents
PART IV.

Item 15.
Exhibits, and Financial Statement Schedules

(a)1. Financial Statements.

The following financial statements are filed as a part of this report:

  Page 

Page
Report of Independent Registered Public Accounting Firm

  38
40
 

Consolidated Financial Statements:

 

Consolidated Balance Sheets as of December 31, 201628, 2019 and December 26, 201529, 2018

  40
43
 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016,28, 2019, December 26, 2015,29, 2018, and December 27, 201430, 2017

  41
42
 

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016,28, 2019, December 26, 2015,29, 2018, and December 27, 201430, 2017

  42
44
 

Consolidated Statements of Cash Flows for the years ended December 31, 2016,28, 2019, December 26, 2015,29, 2018, and December 27, 201430, 2017

  43
45
 

Notes to the Consolidated Financial Statements

  44
46
 

(a)2. Financial Statement Schedules.

All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because they are inapplicable or the required information is shown in the consolidated financial statements, or notes thereto, included herein.

(b)Exhibits

(b) Exhibits
The following is a list of exhibits filed as part of this Form
10-K:

Exhibit No. Title
Exhibit No.
Title
 3.1 
      2.1
Agreement and Plan of Merger, dated May 8, 2019, with Dogfish Head Holding Company, Canoe Acquisition Corp., and solely with respect to the indemnification obligations set forth in the Merger Agreement, Samuel A. Calagione III and Mariah D. Calagione (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 9, 2019).
      2.2
Membership Unit Purchase Agreement, dated May 8, 2019, by and among The Boston Beer Company, Inc., Dogfish East of the Mississippi LP, and solely with respect to indemnification obligations set forth therein, Samuel A. Calagione III and Mariah D. Calagione (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K filed on May 9, 2019).
      2.3
Membership Unit Purchase Agreement, dated as of May 8, 2019, by and among The Boston Beer Company, Inc. and DFH Investors LLC (incorporated by reference to Exhibit 2.3 to the Company’s Form 8-K filed on May 9, 2019).
      3.1
Amended and RestatedBy-Laws of the Company, dated June 2, 1998 (incorporated by reference to Exhibit 3.5 to the Company’s Form10-Q filed on August 10, 1998).
 3.2 
      3.2
Restated Articles of Organization of the Company, dated November 17, 1995, as amended August 4, 1998 (incorporated by reference to Exhibit 3.6 to the Company’s Form10-Q filed on August 10, 1998).
 4.1 
      4.1
Form of Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration StatementNo.
 33-96164).
(P)
 10.1 Deferred Compensation Agreement between the Partnership and Alfred W. Rossow, Jr., effective December 1, 1992 (incorporated by reference to Exhibit 10.3 to the Company’s Registration StatementNo. 33-96162).

 10.2
    *4.2
 
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

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Table of Contents
Exhibit No.
Title
    10.1
Stockholder Rights Agreement, dated as of December 1995, among The Boston Beer Company, Inc. and the initial Stockholders (incorporated by reference to the Company’s Form
10-K,
filed on April 1, 1996).
(P)
 10.3 
    10.2
Second Amended and Restated Credit Agreement between The Boston Beer Company, Inc. and Boston Beer Corporation, as Borrowers, and Bank of America, N.A.(successor-in-merger (successor-in-merger to Fleet National Bank), effective as of July 1, 2002 (incorporated by reference to the Company’s10-Q, filed on August 13, 2002).
 10.4 
    10.3
Letter Agreement dated August 4, 2004 amending the Second Amended and Restated Credit Agreement between Bank of America, N.A.(successor-in-merger (successor-in-merger to Fleet National Bank) and The Boston Beer Company, Inc. and Boston Beer Corporation (incorporated by reference to the Company’s10-Q, filed on November 4, 2004).
 10.5 
    10.4
Amendment dated February 27, 2007 to the Second Amended and Restated Credit Agreement between Bank of America, N.A.,successor-in-merger to Fleet National Bank, and The Boston Beer Company, Inc. and Boston Beer Corporation (incorporated by reference to the Company’s Annual Report on Form10-K filed on March 15, 2007).
 10.6 
    10.5
Amendment to Credit Agreement by and among the Company and Boston Beer Corporation, as borrowers, and Bank of America, N.A., as the lender, effective as of March 10, 2008 (incorporated by reference to the Company’s Quarterly Report on Form10-Q filed on May 6, 2008).
 +10.7 
  +10.6
Production Agreement between Samuel Adams Brewery Company, Ltd. and Brown-Forman Distillery Company, a division of Brown-Forman Corporation, effective as of April 11, 2005 (incorporated by reference to the Company’s10-Q filed on May 5, 2005).
 +10.8 
  +10.7
Brewing Services Agreement between CBC Latrobe Acquisition, LLC and Boston Beer Corporation dated March 28, 2007 (incorporated by reference to the Company’s Quarterly Report on Form10-Q filed on May 10, 2007).
 +10.9 
  +10.8
Office Lease Agreement between Boston Design Center LLC and Boston Beer Corporation dated March 24, 2006 (“Office Lease Agreement”), as amended on September 29, 2006, October 31, 2007, March 25, 2008, August 27, 2012, February 22, 2013, and June 3, 2015 (incorporated by reference to the Company’s Quarterly Report on Form10-Q filed on May 11, 2006 and Annual Report on Form10-K filed on February 18, 2016).
 10.11 Stock Option Agreement between the Company and Martin F. Roper entered into effective as of January 1, 2008 (incorporated by reference to the Company’s Quarterly Report on Form10-Q filed on May 6, 2008).
 10.12
**10.9
 
The 1996 Stock Option Plan for
Non-Employee
Directors, originally adopted in 1996 and amended and restated on October 19, 2004, as amended on October 30, 2009, effective as of January 1, 2010 (incorporated by reference to the Company’s Post-Effective Amendment to its Registration Statement on FormS-8 filed on November 28, 2009); amended and restated on December 12, 2012, effective as of January 1, 2012; amended and restated on March 9, 2016, effective as of March 9, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q
filed on July 21, 2016).
 10.13 
    10.10
Amendment dated January 24, 2014 to the Second Amended and Restated Credit Agreement between Bank of America, N.A.,successor-in-merger to Fleet National Bank, and The Boston Beer Company, Inc. and Boston Beer Corporation (incorporated by reference to the Company’s Current Report on Form8-K filed on January 28, 2014).
 10.14 
**10.11
The Boston Beer Company, Inc. Employee Equity Incentive Plan, as amended on February 23, 1996, December 20, 1997, December 19, 2005, December 19, 2006, December 21, 2007, October 30, 2009, October 8, 2013, October 8, 2014, and December 9, 2015, (incorporated by reference to the Company’s Annual Report on Form10-K filed on February 18, 2016).

    10.15Stock Option Agreement between the CompanyDecember 20, 2017, and Martin F. Roper entered into effective as of January 1, 2016 (incorporated by reference to the Company’s Annual Report on Form10-K filed on February 18, 2016).
    10.16Offer Letter to Frank H. Smalla, Senior Vice President, Finance dated December 15, 2015 (incorporated by reference to the Company’s Annual Report on Form10-K filed on February 18, 2016).
    10.17Offer Letter to Quincy B. Troupe, Senior Vice President, Supply Chain dated December 18, 2015 (incorporated by reference to the Company’s Annual Report on Form10-K filed on February 18, 2016).
    10.18Martin F. Roper Retirement Letter Agreement dated February 2, 201720, 2018 (incorporated by reference to the Company’s Current Report on Form8-K filed on February 6, 2017)December 21, 2018). 

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Table of Contents
Exhibit No.
Title
 10.19 
**10.12
Martin F. Roper Proprietary Information and Restrictive Covenant Agreement dated February 2, 2017 (incorporated by reference to the Company’s Current Report on Form8-K filed on February 6, 2017)
.
 *10.20 
**10.13
Offer Letter to Jonathan N. Potter,David A. Burwick, future Chief Executive Officer and President, dated January 23, 2018 (incorporated by reference to the Company’s Current Report on Form 8-K filed on February 16, 2018).
    10.14
Amendment to Credit Agreement by and among the Company and Boston Beer Corporation, as borrowers, and Bank of America, N.A., as the lender, effective as of March 27, 2018 (incorporated by reference to the Company’s Current Report on Form 8-K filed on March 30, 2018).
**10.15
Employment Agreement of Samuel A. Calagione III, dated July 3, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s 10-Q filed on July 25, 2019)
**10.16
Offer Letter to Lesya Lysyj, future Chief Marketing Officer, dated June 7, 2016.
March 21, 2019 (incorporated by reference to Exhibit 10.5 to the Company’s 10-Q filed on July 25, 2019).
 *11.1 The information required
    10.17
Registration Rights Agreement with the Former Dogfish Head Stockholders, dated July 3, 2019 (incorporated by exhibit 11 has been included in Note N of the notesreference to Exhibit 10.1 to the consolidated financial statements.
Company’s 10-Q filed on July 25, 2019).
 *21.5 
**10.18
Indemnification Agreement with the Dogfish Head Founders, dated July 3, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s 10-Q filed on July 25, 2019).
  *21.5
List of subsidiaries of The Boston Beer Company, Inc. effective as of December 31, 2016.
28, 2019. 
 *23.1 
  *23.1
Consent of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm.
 *23.2 Consent of Ernst & Young LLP, an Independent Registered Public Accounting Firm.
 
*31.1
 
Certification of the President and Chief Executive Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 *31.2 
  *31.2
Certification of the Chief Financial Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 *32.1 
  *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 
  *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.
*101.INS 
*101.INS
XBRL Instance Document
*101.SCH 
*101.SCH
Inline XBRL Taxonomy Extension Schema Document
*101.CAL 
*101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document
*101.LAB 
*101.LAB
Inline XBRL Label Linkbase Document
*101.PRE 
*101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document
*101.DEF 
*101DEF
Inline XBRL Definition Linkbase Document
  104
Cover Page Interactive Data File (formatted as inline XBRL and included in Exhibit 101).

*Filed with this report.
+Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with and approved by the Securities and Exchange Commission.

**Indicates management contract or compensatory plan or arrangement.
Item 16.
Form
10-K
Summary

Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 22nd19
th
day of February 2017.

2020.
THE BOSTON BEER COMPANY, INC.
/s/ Martin F. RoperDavid A. Burwick
Martin F. Roper
David A. Burwick
President and Chief Executive Officer (principal executive officer)

Pursuant to the requirements of the Securities and Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.

Signature

 

Title

/s/ Martin F. Roper

Martin F. Roper

Signature
 
Title
/s/ David A. Burwick
David A. Burwick
President, Chief Executive Officer (principal executive officer) and Director

/s/ Frank H. Smalla

Frank H. Smalla

 
Chief Financial Officer (principal financial officer)

/s/ Matthew D. Murphy

Matthew D. Murphy

 
Chief Accounting Officer (principal accounting officer)

/s/ David A. Burwick

David A. Burwick

 Director

/s/ David P. Fialkow

David P. Fialkow

 
Director

/s/ Cynthia A. Fisher

Cynthia A. Fisher

 
Director

/s/ Meghan V. Joyce
Meghan V. Joyce
Director
/s/ C. James Koch

C. James Koch

 
Chairman and Director

/s/ Jay Margolis

Jay Margolis

 Director

/s/ Michael Spillane

Michael Spillane

 
Director

/s/ Gregg A. Tanner

Gregg A. Tanner

 Director

/s/ Jean-Michel Valette

Jean-Michel Valette

 
Director

75

86