Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended                      March 28,September 26, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number:
1-14092
 
THE BOSTON BEER COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
MASSACHUSETTS
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 Stock. $0.01Stock
.
$0.01 par value
 
SAM
 
New York Stock Exchange
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
☒
  
Yes
  ☒    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer☒  
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated
filer
☐
Smaller reporting company
 ☐
Non-accelerated filer ☐  
Emerging growthSmaller reporting company
 ☐
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 Act.)    Yes  
☐
No  
☒
Number of shares outstanding of each of the issuer’s classes of common stock, as of April 17,October 16, 2020:
Class A Common Stock $.01
, $
.01
par value
9,655,5559,934,625
Class B Common Stock $.01
, $.
01
par value
    
2,522,983
2,307,983
(Title of each class)
    
(Number of shares)
 
 
Table of Contents
THE BOSTON BEER COMPANY, INC.
FORM
10-Q
March 28,September 26, 2020
TABLE OF CONTENTS
PART I.
  
FINANCIAL INFORMATION
  
PAGE
  
Item 1.
Item 1. Consolidated Financial Statements (Unaudited)  
3
  
Consolidated Balance Sheets as of March 28,September 26, 2020 and December 28, 2019  
3
  
Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended March 28,
September 26, 2020 and March 30,September 28, 2019
  
4
  
Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended March 28,September 26, 2020 and March 30,September 28, 2019  
5
  
Consolidated Statements of Cash Flows for the thirteenThirty-nine weeks ended MarchSeptember 26, 2020 and
September 28, 2020 and March 30, 2019
  
6
    Notes to Consolidated Financial Statements  7-19
  
Notes to Consolidated Financial Statements
Item 2.
  
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
19
19-24
  
Item 3.
Item 3. Quantitative and Qualitative Disclosures about Market Risk  
22
25
  
Item 4. Controls and Procedures
  
22
Controls and Procedures  25
PART II.
  
OTHER INFORMATION
  
  
Item1. Legal Proceedings
  
23
Legal Proceedings  25
  
Item1A. Risk Factors
  
23
Risk Factors  25-26
  
Item 2.
Item2. Unregistered Sales of Equity Securities and Use of Proceeds  
24
26-27
  
Item 3.
Item3. Defaults Upon Senior Securities  
24
27
  
Item4. Mine Safety Disclosures
  
24
Mine Safety Disclosures  27
  
Item5. Other Information
  
24
Other Information  27
  
Item6. Exhibits
  
25
Exhibits  27-29
SIGNATURES
  
26
 
EX-31.1
Section 302 CEO Certification
EX-31.2
Section 302 CFO Certification
EX-32.1
Section 906 CEO Certification
EX-32.2
Section 906 CFO Certification
EX-31.1
Section 302 CEO Certification
EX-31.2
Section 302 CFO Certification
EX-32.1
Section 906 CEO Certification
EX-32.2
Section 906 CFO Certification
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
         
 
March 28,
  
December 28,
 
 
2020
  
2019
 
Assets
      
Current Assets:
      
Cash and cash equivalents
 $
129,504
  $
36,670
 
Accounts receivable
  
58,253
   
54,404
 
Inventories
  
124,529
   
106,038
 
Prepaid expenses and other current assets
  
14,894
   
12,077
 
Income tax receivable
  
8,823
   
9,459
 
         
Total current assets
  
336,003
   
218,648
 
Property, plant and equipment, net
  
550,030
   
541,068
 
Operating
right-of-use
assets
  
63,039
   
53,758
 
Goodwill
  
112,529
   
112,529
 
Intangible assets
  
104,209
   
104,272
 
Other assets
  
27,754
   
23,782
 
         
Total assets
 $
1,193,564
  $
1,054,057
 
         
Liabilities and Stockholders’ Equity
      
Current Liabilities:
      
Accounts payable
 $
92,247
  $
76,374
 
Accrued expenses and other current liabilities
  
89,078
   
99,107
 
Current operating lease liabilities
  
5,459
   
5,168
 
         
Total current liabilities
  
186,784
   
180,649
 
Deferred income taxes, net
  
77,389
   
75,010
 
Line of credit
  
100,000
   — 
Non-current operating lease liabilities
  
63,248
   
53,940
 
Other liabilities
  
7,907
   
8,822
 
         
Total liabilities
  
435,328
   
318,421
 
Commitments and Contingencies (See Note K)
      
Stockholders’ Equity:
      
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,559,200 and 9,370,526 issued and outstanding as of March 28, 2020 and December 28, 2019, respectively
  
96
   
94
 
Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 2,522,983 and 2,672,983 issued and outstanding as of March 28, 2020 and December 28, 2019, respectively
  
25
   
27
 
Additional
paid-in
capital
  
576,208
   
571,784
 
Accumulated other comprehensive loss, net of tax
  
(1,727
)  
(1,669
)
Retained earnings
  
183,634
   
165,400
 
         
Total stockholders’ equity
  
758,236
   
735,636
 
         
Total liabilities and stockholders’ equity
 $
 
 
 
1,193,564
  $
 
 
 
1,054,057
 
         
   
September 26,
2020
  
December 28,
2019
 
Assets
       
Current Assets:
   
Cash and cash equivalents
  $157,130  $36,670 
Accounts receivable
   93,809   54,404 
Inventories
   123,831   106,038 
Prepaid expenses and other current assets
   22,214   12,077 
Income tax receivable
   3,041   9,459 
  
 
 
  
 
 
 
Total current assets
   400,025   218,648 
   
Property, plant and equipment, net
   588,977   541,068 
Operating
right-of-use
assets
   59,991   53,758 
Goodwill
   112,529   112,529 
Intangible assets
   103,994   104,272 
Other assets
   46,820   23,782 
  
 
 
  
 
 
 
Total assets
  $1,312,336  $1,054,057 
  
 
 
  
 
 
 
   
Liabilities and Stockholders’ Equity
       
Current Liabilities:
   
Accounts payable
  $108,600  $76,374 
Accrued expenses and other current liabilities
   115,604   99,107 
Current operating lease liabilities
   7,735   5,168 
  
 
 
  
 
 
 
Total current liabilities
   231,939   180,649 
   
Deferred income taxes, net
   89,170   75,010 
Non-current
operating lease liabilities
   61,184   53,940 
Other liabilities
   11,513   8,822 
  
 
 
  
 
 
 
Total liabilities
   393,806   318,421 
   
Commitments and Contingencies
 (See Note K)
  
   
Stockholders’ Equity:
   
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,868,649 and 9,370,526 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively
   99   94 
Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 2,307,983 and 2,672,983 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively
   23   27 
Additional
paid-in
capital
   594,427   571,784 
Accumulated other comprehensive loss, net of tax
   (562)   (1,669) 
Retained earnings
   324,543   165,400 
  
 
 
  
 
 
 
Total stockholders’ equity
   918,530   735,636 
  
 
 
  
 
 
 
Total liabilities and stockholders’ equity
  $1,312,336  $1,054,057 
  
 
 
  
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
         
 
Thirteen weeks ended
 
  
March 28,

2020
  
March 30,

2019
 
Revenue
 $
352,225
  $
267,559
 
Less excise taxes
  
21,660
   
15,908
 
         
Net revenue
  
330,565
   
251,651
 
Cost of goods sold
  
182,592
   
127,111
 
         
Gross profit
  
147,973
   
124,540
 
Operating expenses:
      
Advertising, promotional and selling expenses
  
97,891
   
71,723
 
General and administrative expenses
  
27,029
   
23,374
 
Impairment of assets
  
1,521
   
—
 
         
Total operating expenses
  
126,441
   
95,097
 
         
Operating income
  
21,532
   
29,443
 
Other (expense) income, net:
      
Interest income, net
  
63
   
637
 
Other (expense) income, net
  
(360
)  
(252
)
         
Total other (expense) income, net
  
(297
)  
385
 
         
Income before income tax provision
  
21,235
   
29,828
 
Income tax provision
  
3,001
   
6,134
 
         
Net income
 $
18,234
  $
23,694
 
         
Net income per common share
 -
basic
 $
1.50
  $
2.04
 
         
Net income per common share
 -
diluted
 $
1.49
  $
2.02
 
         
Weighted-average number of common shares
 -
Class A basic
  
9,425
   
8,606
 
         
Weighted-average number of common shares
 -
Class B basic
  
2,645
   
2,918
 
         
Weighted-average number of common shares
 
-
diluted
  
12,186
   
11,636
 
         
Net income
 $
18,234
  $
23,694
 
         
Other comprehensive income:
      
Foreign currency translation adjustment
  
(58
)  
37
 
         
Comprehensive income
 $
18,176
  $
23,731
 
         
 
   
Thirteen weeks ended
  
Thirty-nine weeks ended
 
   
September 26,
2020
  
September 28,
2019
  
September 26,
2020
  
September 28,
2019
 
Revenue
  $525,249  $402,691  $1,358,563  $1,008,893 
Less excise taxes
   32,457   24,225   83,068   60,369 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net revenue
   492,792   378,466   1,275,495   948,524 
Cost of goods sold
   252,207   190,631   677,313   477,147 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   240,585   187,835   598,182   471,377 
                 
Operating expenses:
     
Advertising, promotional and selling expenses
   108,023   96,570   306,250   262,372 
General and administrative expenses
   30,340   31,429   87,054   81,552 
Impairment of assets
   441   —     2,796   243 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   138,804   127,999   396,100   344,167 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   101,781   59,836   202,082   127,210 
 
 
 
 
 
Other income (expense), net:
     
Interest (expense) income, net
   (20)   (138)   (169)   472 
Other income (expense), net
   190   (764)   (222)   (818) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other income (expense), net
   170   (902)   (391)   (346) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income before income tax provision
   101,951   58,934   201,691   126,864 
Income tax provision
   21,183   14,205   42,548   30,585 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
  $80,768  $44,729  $159,143  $96,279 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common
share
 
-
basic
  $6.61  $3.70  $13.05  $8.16 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income per common
share
 
-
diluted
  $6.51  $3.65  $12.90  $8.07 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average number of common
shares
 
-
 
Class 
 A basic
   9,846   9,136   9,663   8,797 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average number of common
shares
 
-
 
Class 
 B basic
   2,308   2,862   2,451   2,899 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average number of common
shares
 
-
 
diluted
   12,333   12,150   12,259   11,823 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
  $80,768  $44,729  $159,143  $96,279 
  
 
 
  
 
 
  
 
 
  
 
 
 
                
Other comprehensive income, net of tax:
     
Foreign currency translation adjustment
   61   1   (10)   43 
Defined benefit plans liability adjustment
   1,117   —     1,117   —   
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other comprehensive income, net of tax
   1,178   1   1,107   43 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  $81,946  $44,730  $160,250  $96,322 
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the thirteen weeksand thirty-nineweeks ended March 28,September 26, 2020 and March 30,September 28, 2019
(in thousands)
(unaudited)
                                 
 
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 28, 2019
  
9,371
  $
94
   
2,673
  $
27
  $
571,784
  $
(1,669
) $
165,400
  $
735,636
 
Net income
                    
18,234
   
18,234
 
Stock options exercised and restricted shares activities
  
38
   
—
         
1,858
         
1,858
 
Stock-based compensation expense
              
2,566
         
2,566
 
Conversion from Class B to Class A
  
150
   
2
   
(150
)  
(2
)           
—
 
Currency translation adjustment
                 
(58
)     
(58
)
                                 
Balance at March 
28
, 20
20
  
9,559
  $
96
   
2,523
  $
25
  $
576,208
  $
(1,727
) $
183,634
  $
758,236
 
                                 
                        
 
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 29, 2018
  
8,580
  $
86
   
2,918
  $
29
  $
405,711
  $
(1,197
) $
55,688
  $
460,317
 
Net income
                    
23,694
   
23,694
 
Stock options exercised and restricted shares activities
  
54
   
—
         
3,704
         
3,704
 
Stock-based compensation expense
              
2,066
         
2,066
 
Currency translation adjustment
                 
37
      
37
 
                                 
Balance at March 30, 2019
  
8,634
  $
86
   
2,918
  $
29
  $
411,481
  $
(1,160
) $
79,382
  $
489,818
 
                                 
 
   
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 28, 2019
   9,371   $94    2,673  $27  $571,784   $(1,669)  $165,400   $735,636 
Net income
            18,234    18,234 
Stock options exercised and restricted shares activities
   38    —        1,858       1,858 
Stock-based compensation expense
         2,566       2,566 
Conversion from Class B to Class A
   150    2    (150)   (2)        —   
Currency translation adjustment
           (58)     (58) 
               
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at March 28, 2020
   9,559   $96    2,523  $25  $576,208   $(1,727)  $183,634   $758,236 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
               
Net income
            60,141    60,141 
Stock options exercised and restricted shares activities
   61    —        4,582       4,582 
Stock-based compensation expense
         4,537       4,537 
Conversion from Class B to Class A
   215    2    (215)   (2)        —   
Currency translation adjustment
           (13)     (13) 
               
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at June 27, 2020
   9,835   $98    2,308  $23  $585,327   $(1,740)  $243,775   $827,483 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
               
Net income
            80,768    80,768 
Stock options exercised and restricted shares activities
   34    1      5,468       5,469 
Stock-based compensation expense
         3,632       3,632 
Defined benefit plans liability adjustment, net of tax of $378
           1,117     1,117 
Currency translation adjustment
           61     61 
               
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at September 26, 2020
   9,869   $99    2,308  $23  $594,427   $(562)  $324,543   $918,530 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
   
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 29, 2018
   8,580   $86    2,918  $29  $405,711   $(1,197)  $55,688   $460,317 
Net income
            23,694    23,694 
Stock options exercised and restricted shares activities
   54    —        3,704       3,704 
Stock-based compensation expense
         2,066       2,066 
Currency translation adjustment
           37     37 
               
  
 
    
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at March 30, 2019
   8,634   $86    2,918  $29  $411,481   $(1,160)  $79,382   $489,818 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
                                
Net income
            27,856    27,856 
Stock options exercised and restricted shares activities
   21    1      1,377       1,378 
Stock-based compensation expense
         3,744       3,744 
Currency translation adjustment
           5     5 
              
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at June 29, 2019
   8,655   $87    2,918  $29  $416,602   $(1,155)  $107,238   $522,801 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
               
Net income
            44,729    44,729 
Stock options exercised and restricted shares activities
   31    —        3,473       3,473 
Stock-based compensation expense
         3,233       3,233 
Shares issued in connection with Dogfish Head merger
   430    4            144,739             144,743 
Conversion from Class B to Class A
   100    1    (100)   (1)                 —   
Currency translation adjustment
           1     1 
               
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Balance at September 28, 2019
   9,216   $92    2,818  $28  $568,047   $(1,154)  $151,967   $718,980 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
   
Thirty-nine weeks ended
 
   
September 26,
2020
  
September 28,
2019
 
Cash flows provided by operating activities:
   
Net income
  $159,143  $96,279 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Depreciation and amortization
   48,937   41,841 
Impairment of assets
   2,796   243 
(Gain) loss on disposal of property, plant and equipment
   (173)   449 
Change in ROU assets
   5,465   2,734 
Credit loss expense
   746   53 
Stock-based compensation expense
   10,735   9,043 
Deferred income taxes
   14,160   14,047 
Changes in operating assets and liabilities:
   
Accounts receivable
   (39,775)   (26,532) 
Inventories
   (23,072)   (16,847) 
Prepaid expenses, income tax receivable and other current assets
   (4,043)   (1,173) 
Other assets
   (17,827)   (12,730) 
Accounts payable
   33,020   22,388 
Accrued expenses and other current liabilities
   18,024   14,949 
Change in operating lease liability
   (1,887)   (2,270) 
Other liabilities
   2,671   207 
  
 
 
  
 
 
 
Net cash provided by operating activities
   208,920   142,681 
  
 
 
  
 
 
 
        
Cash flows used in investing activities:
   
Purchases of property, plant and equipment
   (100,341)   (66,760) 
Proceeds from disposal of property, plant and equipment
   72   144 
Investment in Dogfish Head, net of cash acquired
   0     (165,517) 
Other investing activities
   392   (10) 
  
 
 
  
 
 
 
Net cash used in investing activities
   (99,877)   (232,143) 
  
 
 
  
 
 
 
 
  
Cash flows provided by financing activities:
   
Proceeds from exercise of stock options and sale of investment shares
   14,015   8,437 
Cash
paid on note payable and finance leases
   (906)   (246) 
Cash borrowed on line of credit
   100,000   97,000 
Cash paid on line of credit
   (100,000)   (97,000) 
Payment of tax withholdings on stock-based payment awards and investment shares
   (1,692)   —   
  
 
 
  
 
 
 
Net cash provided by financing activities
   11,417   8,191 
  
 
 
  
 
 
 
Change in cash and cash equivalents
  120,460   (81,271) 
         
Cash and cash equivalents at beginning of year
   36,670   108,399 
  
 
 
  
 
 
 
         
Cash and cash equivalents at end of period
  $157,130  $27,128 
  
 
 
  
 
 
 
        
Supplemental disclosure of cash flow information:
   
Non cash consideration issued in Dogfish Head Brewery Transaction (Refer to Note C)
  $—    $144,743 
  
 
 
  
 
 
 
Income taxes paid
  $17,309  $16,759 
  
 
 
  
 
 
 
Cash paid for amounts included in measurement of lease liabilities
   
Operating cash flows from operating leases
  $6,949  $3,178 
  
 
 
  
 
 
 
Operating cash flows from finance leases
  $106  $258 
  
 
 
  
 
 
 
Financing cash flows from finance leases
  $838  $7 
  
 
 
  
 
 
 
Right-of-use
assets obtained in exchange for operating lease obligations
  $11,698  $41,678 
  
 
 
  
 
 
 
Right-of-use
assets obtained in exchange for finance lease obligations
  $2,689  $2,837 
  
 
 
  
 
 
 
Interest paid on revolving credit facility
  $246  $349 
  
 
 
  
 
 
 
Change in purchase of property, plant and equipment in accounts payable and accrued expenses
  $(3,390)  $(2,076) 
  
 
 
  
 
 
 
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOWS
(in thousands)
(unaudited)
         
 
Thirteen weeks ended
 
 
March 28,
  
March 30,
 
 
2020
  
2019
 
Cash flows provided by operating activities:
      
Net income
 $
18,234
  $
23,694
 
Adjustments to reconcile net income to net cash provided by operating activities:
      
Depreciation and amortization
  
15,945
   
12,863
 
Impairment of assets
  
1,521
   
—
 
Loss on disposal of property, plant and equipment
  
—
   
271
 
Change in ROU assets
  
1,807
   
859
 
Credit loss
 expense
  
552
   
—
 
Stock-based compensation expense
  
2,566
   
2,066
 
Deferred income taxes
  
2,379
   
1,029
 
Changes in operating assets and liabilities:
      
Accounts receivable
  
(4,436
)  
(20,452
)
Inventories
  
(23,856
)  
(15,353
)
Prepaid expenses, income tax receivable and other assets
  
(884
)  
1,336
 
Accounts payable
  
14,264
   
14,400
 
Accrued expenses and other current liabilities
  
(7,579
)  
(6,465
)
Change in operating lease liability
  
(1,489
)  
(624
)
Other liabilities
  
(100
)  
19
 
         
Net cash provided by operating activities
  
18,924
   
13,643
 
         
Cash flows used in investing activities:
      
Purchases of property, plant and equipment
  
(27,394
)  
(22,080
)
Proceeds from disposal of property, plant and equipment
  
35
   
1
 
Other investing activities
  
96
   
28
 
         
Net cash used in investing activities
  
(27,263
)  
(22,051
)
         
Cash flows provided by financing activities:
      
Proceeds from exercise of stock options and sale of investment shares
  
2,941
   
2,968
 
Net cash paid on note payable and finance leases
  
(209
)  
(72
)
Payment of tax withholdings on stock-based payment awards and investment shares
  (1,559
)
  — 
Cash borrowed on line of credit
  
100,000
   
—
 
         
Net cash provided by financing activities
  
101,173
   
2,896
 
         
Change in cash and cash equivalents
  
92,834
   
(5,512
)
Cash and cash equivalents at beginning of year
  
36,670
   
108,399
 
         
Cash and cash equivalents at end of period
 $
129,504
  $
102,887
 
         
Supplemental disclosure of cash flow information:
      
Income taxes paid
 $
5
  $
207
 
         
Cash paid for amounts included in measurement of lease liabilities
  
  
   
  
 
Operating cash flows from operating leases
 $
2,097
  $
885
 
         
Operating cash flows from finance leases
 $
22
  $
8
 
         
Financing cash flows from finance leases
 $
141
  $
7
 
         
Right-of-use assets obtained in exchange for operating lease obligations
 $
11,088
  $
27,034
 
         
Right-of-use assets obtained in exchange for finance lease obligations 
$
—  
$
 
3
 
Change in purchase of property, plant and equipment in accounts payable and accrued expenses
 $(1,029)  $
118
 
         
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
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
®
”, “Hard Seltzer Beverage Company”, “Twisted Tea Brewing Company
®
”, “Hard Seltzer Beverage Company”, “Angry Orchard
®
Cider Company”, “Dogfish Head
®
Craft Brewery”, “Angel City
®
Brewing Company”, “Concrete Beach Brewery
®
”, “Coney Island
®
Brewing Company” and “American Fermentation Company”.
The accompanying unaudited consolidated balance sheet as of March 28,September 26, 2020, and the
unaudited
consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the interim periods ended March 28,September 26, 2020 and March 30,September 28, 2019 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. All intercompany accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019.
In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as of March 28,September 26, 2020 and the results of its consolidated operations, stockholders’ equity, and cash flows for the interim periods ended March 28,September 26, 2020 and March 30,September 28, 2019, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
B.
COVID-19
Pandemic
In early March 2020, theThe Company began seeing the impact of the
COVID-19
pandemic on its business.business in early March. The direct financial impact wasof the pandemic has primarily shown in significantly reduced keg demand from the
on-premise
channel as well as increasedand higher labor and safety related costs at the Company’s breweries. InFor the first quarter ofthirty-nine weeks ended September 26, 2020, the Company recorded
COVID-19
related
pre-tax
related reductions in net revenue and increases in other costs that total $14.2 million of which $10.0 million. Thismillion was recorded in the first quarter, $4.1 million was recorded in the second quarter and $0.1 million was recorded in the third quarter. The total amount consists of a $5.8$3.4 million reduction in net revenue for estimated keg returns from distributors and retailers and $4.2$10.8 million offor inventory write-downs for obsolescence, increased costs for health and safety, increased salaries and benefits and other
COVID-19
related direct costs, of which $3.6$7.4 million are recorded in cost of goods sold and $0.6 
$3.4 million are recorded in operating expenses. In addition to these direct financial impacts,
COVID-19
related safety measures resulted in a reduction of brewery productivity. This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins. While the duration of the disruption and related impact on the Company’s consolidated financial statements is currently uncertain, the Company expects this matter willto continue to negatively impact its results of operations.incur increased costs related to health and safety for the foreseeable future.
C. Dogfish Head Brewery Transaction
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.
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Table of Contents
The fair valueCompany’s allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Transaction is based on estimated at approximately $317.7 million.fair values as of July 3, 2019, and was finalized on July 3, 2020. 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
 
     
 
   
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 the fair value of customer relationships is estimated at $3.8 million. The Company estimated 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 the purchase price paid over the estimated fair values of the assets and liabilities assumed has been recorded as goodwill in 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.
8
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 and market valuation approaches.
The results of operations from Dogfish Head have been included in the Company’s consolidated statements of comprehensive income since the July 3, 2019 Transaction closing date.
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.
8
Table of Contents
The following unaudited pro forma information has been prepared as if the Transaction and the related debt financing had occurred as of December 30, 2018, the first day of the Company’s 2019 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 30, 2018.
(ii)Transaction costs incurred to date 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)(ii)
The tax effects of the pro forma adjustments at an estimated statutory rate of 23.6%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.
         
 
Thirteen weeks ended
 
 
March 28,
  
March 30,
 
 
2020
  
2019
 
 
(in thousands)
 
Net revenue
 $
330,565
  $
276,739
 
Net income
 $
18,234
  $
24,664
 
Basic earnings per share
 $
1.50
  $
2.04
 
Diluted earnings per share
 $
1.49
  $
2.02
 
D.
Goodwill and Intangible Assets
 
 
  
Thirteen weeks ended
 
  

Thirty-nine weeks ended
 
 
  
September 28,
2019
 
  
September 28,
2019
 
 
  
(in thousands)
 
 
  
(in thousands)
 
 
Net revenue
  
$
379,205
 
  
$
1,002,959
 
Net income
  
$
46,445
 
  
$
103,105
 
Basic earnings per share
  
$
3.84
 
  
$
8.74
 
Diluted earnings per share
  
$
3.79
 
  
$
8.64
 
There were no changes in the carrying value of goodwill during the thirteen weeks ended March 28, 2020
D. Goodwill and March 30, 2019.Intangible Assets
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Table of Contents
The Company’s intangible assets as of March 28,September 26, 2020 and December 28, 2019 were as follows:
                             
   
As of March 28, 2020
  
As of December 28, 2019
 
 
Estimated Useful
  
Gross Carrying
  
Accumulated
  
Net Book
  
Gross Carrying
  
Accumulated
  
Net Book
 
 
Life (Years)
  
Value
  
Amortization
  
Value
  
Value
  
Amortization
  
Value
 
 
 
 
 
(in thousands)
 
Custmer Relationships
  
15
  $
3,800
  $
(190
) $
3,610
  $
3,800
  $
(127
) $
3,673
 
Trade Names
  
Indefinite
   
100,599
   —     
100,599
   
100,599
   —     
100,599
 
                             
Total intangible assets
    $
104,399
  $
(190
) $
104,209
  $
104,399
  $
(127
) $
104,272
 
                             
 
 
  
 
 
  
As of September 26, 2020
 
 
As of December 28, 2019
 
 
  
Estimated
Useful Life
(Years)
 
  
Gross
Carrying
Value
 
  
Accumulated
Amortization
 
 
Net Book Value
 
 
Gross
Carrying
Value
 
  
Accumulated
Amortization
 
 
Net Book
Value
 
 
  
   
  
   
  
   
 
 
(in thousands
) 
 
   
  
   
 
   
Custmer Relationships
  
 
15
 
  
$
3,800
 
  
$
(316
) 
 
$
3,484
 
 
$
3,800
 
  
$
(127
) 
 
$
3,673
 
Trade Names
  
 
Indefinite
 
  
 
100,510
 
  
 
—  
 
 
 
100,510
 
 
 
100,599
 
  
 
—  
 
 
 
100,599
 
 
  
   
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Total intangible assets
  
   
  
$
104,310
 
  
$
(316
) 
 
$
103,994
 
 
$
104,399
 
  
$
(127
) 
 
$
104,272
 
 
  
   
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
As disclosed within Note C, the Company acquired intangible assets as part of the Dogfish Head Transactiontransaction that consists
consist
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 will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the thirteen and thirty-nine weeks ended March 28,September 26, 2020 was approximately $63,000.$63,000 and $190,000, respectively. The Company expects to record amortization expense as follows over the remaining current year and the five subsequent years:
     
Fiscal Year
 
Amount
(in thou
sands)
 
Remainder of 2020
 $
190
 
2021
  
253
 
2022
  
253
 
2023
  
253
 
2024
  
253
 
2025
  
253
 
 
Fiscal Year
   
Amount (in thousands)
 
Remainder of 2020
   $63 
2021
    253 
2022
    253 
2023
    253 
2024
    253 
2025
    253 
E. Recent Accounting Pronouncements
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
9
Table of Contents
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 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 adopted the standard in the first quarter of fiscal 2020 and there was no material impact.
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
is effective prospectively for the year beginning December 29, 2019. The Company completes itsadopted the standard in the third quarter of 2020 during the annual goodwill impairment assessment during the third quarter. The Company does not expect the adoption of ASU
2017-04
to have aand there was no material impact on its consolidated financial statements.
impact.
Accounting Pronouncements Not Yet Effective
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard includes multiple key provisions, including removal of certain exceptions to ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, 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.
F. Revenue Recognition
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Table of Contents
F.
Revenue Recognition
During the thirteenthirty-nine weeks ended MarchSeptember 26, 2020 and September 28, 2020
and March
30,
2019
approximately 96%95% of the Company’s revenue was from shipments of its products to domestic distributors,
,
 3% 4% from shipments to international distributors, primarily located in Canada
and
1%
was
from retail beer, cider, and merchandise sales at the Company’s retail locations.
The Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of consideration expected to 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 March 28,September 26, 2020 and December 28, 2019, the Company has deferred $13.9$11.5 million and $7.0 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.
Customer promotional discount programs are entered into by the Company with distributors for certain periods of time. The reimbursements for discounts to distributors are recorded as reductions to net revenue and were $8.2$19.0 million and $6.2$47.6 million for the thirteen and thirty-nine weeks ended MarchSeptember 26, 2020, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue and were $14.8 million and $34.5 million for the thirteen and thirty-nine weeks ended September 28, 2020 and March 30, 2019, respectively. 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 programs and incentives are a common practice in the alcohol beverage industry. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses
,
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
10
Table of Contents
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 for the thirteen and thirty-nine weeks ended September 26, 2020 were $7.5 million and $16.9 million, respectively. For the thirteen and thirty-nine weeks ended September 26, 2020, the Company recorded certain of these costs in the total amount of $6.9 million and $15.9 million, respectively as reductions to net revenue. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended MarchSeptember 28, 2020 and March 30, 2019 were $4.2$7.8 million and $3.1$17.8 million, respectively. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended September 2
8
, 2019 were $6.2 million and $13.0 million, respectively. 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 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.
The Further ConsolidatedConsolidation Appropriations Act, 2020 extendsextended reductions in federal excise taxes as a result of the Tax Cuts and Jobs Act of 2017 through December 31, 2020. The Company benefited from a reduction in federal excise taxes of $2.6$4.0 million and $1.7$2.8 million for the thirteen weeks ended March 28,September 26, 2020 and March 30,September 28, 2019, respectively. The Company benefited from a reduction in federal excise taxes of $9.8 million and $6.6 million for the thirty-nine weeks ended September 26, 2020 and September 28, 2019 respectively.
On March 31, 2020, The Alcohol and Tobacco Tax and Trade Bureaus (“TTB”) released TTB Industry Circular
2020-2,
which postponed all Federal excise tax payments for ninety days on sales of wine, beer and distilled spirits between March 1, 2020 and July 1, 2020. As a September 26, 2020, the Company had accrued federal excise taxes of $8.6 million in accrued expenses and other current liabilities,
which will be fully paid during the fourth quarter of 2020.
Shipment volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 28, 2020 when compared to March 30, 2019.
The Company believes distributor inventory as of March 28,September 26, 2020 averaged approximately 62 weeks on hand and was at an appropriate level based on thelower than prior year levels due to depletions outpacing supply chain capacity constraints and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer.constrained shipments. The Company expects wholesaler inventory levels in terms of weeks on hand to return to more normal levels of approximatelyremain between 1 and 4 weeks on hand later infor the
remainder
of the year.
11
Table of Contents
G. Inventories
G.
Inventories
Inventories consist of raw materials, work in process and finished goods. Raw materials, which principally consist of hops,
,
flavorings,
apple juice, other brewing materials and packaging, are stated at the lower of cost, determined on the
first-in,
first-out
basis, or net realizable value. The Company’s goal is to maintain on hand a supply of at least one year 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. Inventories consist of the following:
         
  
March 28,
  
December 28,
 
 
2020
  
2019
 
 
(in thousands)
 
Current inventory:
      
Raw materials
 $
73,267
  $
61,522
 
Work in process
  
14,775
   
12,631
 
Finished goods
  
36,487
   
31,885
 
         
Total current inventory
  
124,529
   
106,038
 
Long term inventory
  
15,413
   
10,048
 
         
Total inventory
 $
139,942
  $
116,086
 
         
 
   
September 26,
   
December 28,
 
   
2020
   
2019
 
   
(in thousands)
 
Current inventory:
    
Raw materials
  $61,705   $61,522 
Work in process
   14,287    12,631 
Finished goods
   47,839    31,885 
  
 
 
   
 
 
 
Total current inventory
   123,831    106,038 
Long term inventory
   15,327    10,048 
  
 
 
   
 
 
 
Total inventory
  $139,158   $116,086 
  
 
 
   
 
 
 

11
Table of Contents
H. Leases
Leases
The Company 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 2034. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. ROU assets and lease liabilities commencing after December 30, 2018 are recognized at commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. As of March 
28
,September 26, 2020, and December 28, 2019 total ROU assets and lease liabilities were as follows:
           
 
 
Classification
 
Leases
 
 
 
 
 
March 28,
  
December 28,
 
  
2020
  
2019
 
  
(in thousands)
 
Right-of-use
assets
       
Operating lease assets
 
Operating
right-of-use
assets
 $
 
63,039
  $
53,758
 
Finance lease assets
 
Property, plant and equipment, net
  
2,398
   
2,531
 
Lease Liabilities
       
Current
       
Operating lease liabilities
 
Current operating lease liabilities
  
5,459
   
5,168
 
Finance lease liabilities
 
Accrued expenses and other current liabilities
  
551
   
546
 
Non-current
       
Operating lease liabilities
 
Non-current
operating lease liabilities
  
63,248
   
53,940
 
Finance lease liabilities
 
Other liabilities
  
1,896
   
2,042
 
 
   
Classification
  
Leases
 
      
September 26,

2020
   
December 28,

2019
 
            
      
(in thousands)
 
Right-of-use
assets
      
Operating lease assets  Operating
right-of-use
assets		  $59,991   $53,758 
Finance lease assets  Property, plant and equipment, net   4,389    2,531 
Lease Liabilities
      
Current      
Operating lease liabilities
  Current operating lease liabilities   7,735    5,168 
Finance lease liabilities
  Accrued expenses and other current liabilities   1,441    546 
Non-current      
Operating lease liabilities
  
Non-current
operating lease liabilities		   61,184    53,940 
Finance lease liabilities
  Other liabilities   2,997    2,042 
The gross value and accumulated depreciation of ROU assets related to finance leases as of March 28,September 26, 2020 and December 28, 2019 were as follows:
         
 
Finance Leases
 
  
March 28,
  
December 28,
 
 
2020
  
2019
 
 
(in thousands)
 
Gross value
 $
2,837
  $
2,837
 
Accumulated amortization
  
(439
)  
(306
)
         
Carrying value
 $
2,398
  $
2,531
 
         
12
   
Finance Leases
 
   
September 26,
   
December 28,
 
   
2020
   
2019
 
   
(in thousands)
 
Gross value
  $5,525   $2,837 
Accumulated amortization
   (1,136)    (306) 
  
 
 
   
 
 
 
Carrying value
  $4,389   $2,531 
  
 
 
   
 
 
 
Table of Contents
Components of lease cost for the thirteen and thirty-nine weeks ended March 28,September 26, 2020 and March 30,September 28, 2019 were as follows:
         
 
Lease Cost
 
  
March 28,
  
March 30,
 
 
2020
  
2019
 
 
(in thousands)
 
Operating lease cost
 $
2,415
  $1,128 
Variable lease costs not included in liability
  485
   199
 
Finance lease cost:
      
Amortization of
right-of-use
asset
  
133
   —   
Interest on lease liabilities
  
22
   —   
         
Total finance lease cost
 $
155
  $
—
 
 
 
         
   
Lease Cost
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
September 26,
   
September 28,
   
September 26,
   
September 28,
 
   
2020
   
2019
   
2020
   
2019
 
   
(in thousands)
   
(in thousands)
 
Operating lease cost
  $2,425   $1,375   $7,277   $3,680 
Variable lease costs not included in liability
   349    171    1,321    643 
Finance lease cost:
          
Amortization of
right-of-use
asset
   257    131    830    174 
Interest on lease liabilities
   31    206    106    258 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total finance lease cost
  $288   $337   $936   $432 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
12
Table of Contents
Maturities of lease liabilities as of March 28,September 26, 2020 were as follows:
                 
 
Operating
Leases
  
Capital
Leases
  
Weighted-Average
 
Remaining Term in
 
Years
 
Operating
 
Leases
  
Capital
 
Leases
 
 
(in thousands)
  
 
 
 
2020
 $
3,962
  $
464
       
2021
  
9,816
   
626
       
2022
  
9,695
   
626
       
2023
  
9,694
   
626
       
2024
  
9,470
   
265
       
Thereafter
  
39,524
   
23
       
                 
Total lease payments
  
82,161
   
2,630
       
Less imputed interest (based on 3.5% weighted-average discount rate)
  
(13,454
)  
(183
)      
                 
Present value of lease liability
 $
68,707
  $
2,447
   
9.4
   
4.5
 
                 
The Company has additional lease liabilities of $3.9 million which have not yet commenced as of March 28, 2020, and as such, have not been recognized on the Company’s Consolidated balance sheet. These leases are expected to commence during the second quarter of 2020 with a term of three years.
I.
Net Income per Share
 
   
Operating
Leases
   
Finance
Leases
   
Weighted-Average Remaining Term in Years
 
   
Operating Leases
   
Finance Leases
 
   
(in thousands)
         
2020
  $2,464   $391     
2021
   10,094    1,572     
2022
   9,908    1,572     
2023
   9,737    863     
2024
   9,470    265     
Thereafter
   39,523    22     
  
 
 
   
 
 
     
Total lease payments
   81,196    4,685     
Less imputed interest (based on 3.5% weighted
 
-
 
average discount rate)
   (12,277)    (247)     
  
 
 
   
 
 
   
 
 
   
 
 
 
Present value of lease liability
  $68,919   $4,438    9.0    3.1 
I. Net Income per Share
The Company calculates net income per share using the
two-class
method, which requires the Company to allocate net income to its Class A Common Shares, Class B Common Shares and unvested share-based payment awards that participate in dividends with common stock, in the calculation of net income per share.
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.
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 the Class B Common Stock is freely convertible into one share of Class A Common Stock, upon request of the respective Class B holder, and participates equally in dividends.
13
Table of Contents
The Company’s unvested share-based payment awards include unvested shares (1) issued under the Company’s 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 and to purchase those shares at a discount ranging from 20% to 40% below market value based on years of employment starting after two years of employment, and (2) awarded as restricted stock awards at the discretion of the Company’s Board of Directors. The investment shares and restricted stock awards generally vest over five years in equal number of shares. The unvested shares participate equally in dividends. See Note O for a discussion of the current year unvested stock awards and issuances.
Included in the computation of net income per diluted common share are dilutive
outstanding
stock options and restricted stock that are vested or expected to vest. At its discretion, the Board of Directors grants stock options and restricted stock to senior management and certain key employees. The terms of the employee stock options are determined by the Board of Directors at the time of grant. To date, stock options granted to employees vest over various service periods and/or based on the attainment of certain performance criteria and generally expire after ten years. In December 2018, the Employee Equity Incentive Plan was amended to permit the grant of restricted stock units. The restricted stock units generally vest over four years in equal number of shares. Each restricted stock unit represents an unfunded and
unsecured
right to receive one share of Class A Stock upon satisfaction of the vesting criteria. The unvested shares participate equally in dividends and are forfeitable. Prior to March 1, 2019, the Company granted restricted stock awards, generally vesting over five years in equal number of shares. The Company also grants stock options to its
non-employee
directors upon election or
re-election
to the Board of Directors.
The number of option shares granted to
non-employee
directors is calculated based on a defined formula and these stock options vest immediately upon grant and expire after ten years.
13
Table of Contents
Net Income per Common Share
 -
Share—Basic
The following table sets forth the computation of basic net income per share using the
two-class
method:
         
 
Thirteen weeks ended
 
 
March 28,
  
March 30,
 
 
2020
  
2019
 
 
(in thousands, except per share data)
 
Net income
 $
18,234
  $
23,694
 
         
Allocation of net income for basic:
      
Class A Common Stock
 $
14,136
  $
17,525
 
Class B Common Stock
  
3,967
   
5,942
 
Unvested participating shares
  
131
   
227
 
         
  $18,234  $23,694 
Weighted average number of shares for basic:
      
Class A Common Stock
  
9,425
   
8,606
 
Class B Common Stock*
  
2,645
   
2,918
 
Unvested participating shares
  
87
   
111
 
         
 
12,157
  
11,635
 
Net income per share for basic:
      
Class A Common Stock
 $
1.50
  $
2.04
 
         
Class B Common Stock
 $
1.50
  $
2.04
 
         
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
September 26,
   
September 28,
   
September 26,
   
September 28,
 
   
2020
   
2019
   
2020
   
2019
 
   
(in thousands, except per share data)
   
(in thousands, except per share data)
 
Net income
  $80,768   $44,729   $159,143   $96,279 
  
 
 
   
 
 
   
 
 
   
 
 
 
Allocation of net income for basic:
        
Class A Common Stock
  $65,074   $33,776   $126,146   $71,761 
Class B Common Stock
   15,254    10,581    31,996    23,652 
Unvested participating shares
   440    372    1,001    866 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $80,768   $44,729   $159,143   $96,279 
Weighted average number of shares for basic:
        
Class A Common Stock
   9,846    9,136    9,663    8,797 
Class B Common Stock*
   2,308    2,862    2,451    2,899 
Unvested participating shares
   67    101    77    106 
  
 
 
   
 
 
   
 
 
   
 
 
 
   12,221    12,099    12,191    11,802 
Net income per share for basic:
        
Class A Common Stock
  $6.61   $3.70   $13.05   $8.16 
  
 
 
   
 
 
   
 
 
   
 
 
 
Class B Common Stock
  $6.61   $3.70   $13.05   $8.16 
  
 
 
   
 
 
   
 
 
   
 
 
 
*
Change in Class B Common Stock resulted from the conversion of 100,000 shares to Class A Common Stock on August 8, 2019, 145,000 shares to Class A Common Stock on December 13, 2019, and 150,000 shares to Class A Common Stock on March 11, 2020 and 215,000 shares to Class A Common Stock on May 6, 2020 with the ending number of shares reflecting the weighted average for the period.
14
Table of Contents
Net Income per Common Share
 -Share—Diluted 
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.
The following table sets 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:
                         
 
Thirteen weeks ended
 
 
March 28, 2020
  
March 30, 2019
 
 
Earnings to
Common
Shareholders
  
Common Shares
  
EPS
  
Earnings to
Common
Shareholders
  
Common Shares
  
EPS
 
 
(in thousands, except per share data)
 
As reported
 
-
basic
 $
14,136
   
9,425
  $
1.50
  $
17,525
   
8,606
  $
2.04
 
Add: effect of dilutive potential common shares
                  
Share-based awards
  
—
 
 
   
116
      
—
 
 
   
112
    
Class B Common Stock
  
3,967
   
2,645
      
5,942
   
2,918
    
Net effect of unvested participating shares
  
1
   
—
 
 
      
2
   
—
 
 
    
                         
Net income per common share
 -
diluted
 $18,104   
12,186
  $
1.49
  $23,469   
11,636
  $
2.02
 
                         
 
 
  
Thirteen weeks ended
 
 
  
September 26, 2020
 
  
September 28, 2019
 
 
  
Earnings to
Common
Shareholders
 
  
Common
Shares
 
  
EPS
 
  
Earnings to
Common
Shareholders
 
  
Common
Shares
 
  
EPS
 
 
  
   
  
   
  
 
(in thousands, except per share data)
 
  
   
  
   
As reported—basic
  
$
65,074
 
  
 
9,846
 
  
$
6.61
 
  
$
33,776
 
  
 
9,136
 
  
$
3.70
 
Add: effect of dilutive potential common shares
  
   
  
   
  
   
  
   
  
   
  
   
Share-based awards
  
 
—  
 
  
 
179
 
  
   
  
 
—  
 
  
 
152
 
  
   
Class B Common Stock
  
 
15,254
 
  
 
2,308
 
  
   
  
 
10,581
 
  
 
2,862
 
  
   
Net effect of unvested participating shares
  
 
6
 
  
 
—  
 
  
   
  
 
4
 
  
 
—  
 
  
   
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net income per common share—diluted
  
$
80,334
 
  
 
12,333
 
  
$
6.51
 
  
$
44,361
 
  
 
12,150
 
  
$
3.65
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
  
Thirty-nine weeks ended
 
 
  
September 26, 2020
 
  
September 28, 2019
 
 
  
Earnings to
Common
Shareholders
 
  
Common
Shares
 
  
EPS
 
  
Earnings to
Common
Shareholders
 
  
Common
Shares
 
  
EPS
 
 
  
 
 
  
 
 
  
(in thousands, except per share data)
 
  
 
 
  
 
 
As reported—basic
  
$
126,146
 
  
 
9,663
 
  
$
13.05
 
  
$
71,761
 
  
 
8,797
 
  
$
8.16
 
Add: effect of dilutive potential common shares
  
   
  
   
  
   
  
   
  
   
  
   
Share-based awards
  
 
—  
 
  
 
145
 
  
   
  
 
—  
 
  
 
127
 
  
   
Class B Common Stock
  
 
31,996
 
  
 
2,451
 
  
   
  
 
23,652
 
  
 
2,899
 
  
   
Net effect of unvested participating shares
  
 
12
 
  
 
—  
 
  
   
  
 
8
 
  
 
—  
 
  
   
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net income per common share—diluted
  
$
158,154
 
  
 
12,259
 
  
$
12.90
 
  
$
95,421
 
  
 
11,823
 
  
$
8.07
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
Weighted-average
14
Table of Contents
During the
thirteen
and thirty-nine weeks ended
September 
26, 2020,
weighted
-average stock
options
to purchase approximately 33,0000 and 15,0001,000 shares of Class A Common Stock were outstanding during the thirteen weeks ended March 28, 2020 and March 30, 2019, respectively, but not included in computing dilutive income per common share because their effects were anti-dilutive. Additionally, performance-basedDuring the thirteen and thirty-nine weeks ended September 28, 2019, weighted-average stock options to purchase approximately 10,00027,000 and 10,00021,000 shares of Class A Common Stock were outstanding as of March 28, 2020 and March 30, 2019, respectively, but not included in computing diluteddilutive income per common share because the performance criteria of these stock optionstheir effects were not met as of the end of the reporting period.
All of the performance-based stock options to purchase approximately 10,000 shares of Class A Common Stock that were excluded from computing diluted net income per common share as of March 28, 2020, were granted in 2016 to a key employee.
The vesting of these shares requires annual depletions, or sales by
distributors
to retailers, of certain of the Company’s brands to attain various thresholds during the period from 2017 to 2023.
anti-dilutive.
J. Comprehensive Income or Loss
J.
Comprehensive Income or Loss
Comprehensive income or loss represents net income or loss, plus
a
defined benefit plans liability adjustment, net of tax effect and foreign currency translation adjustment. The Company incurred a $1.1 million settlement loss, net of tax, during the thirteen weeks ended September 26, 2020, as a result of terminating
a
defined benefit plans liability andplan. See Note P for discussion of the defined benefit plan termination. The foreign currency translation adjustments for the interim periodsperiod ended March 28, 2020 and MarchSeptember 28, 2019 werewas not material.
K.
Commitments and Contingencies
K. Commitments and Contingencies
Contract Obligations
As of September 26, 2020, projected cash outflows under
non-cancelable
contractual obligations are as f
o
llows:
   
Commitments
 
   (in thousands) 
Ingredients
  $130,933 
Equipment and machinery
   73,774 
Brand support
   62,496 
Other
   12,378 
  
 
 
 
Total contractual obligations
  $279,581 
  
 
 
 
The Company had outstanding total
non-cancelable
majority of these contract obligations of $239.9 milli
on a
t March 28, 2020. These obligations are made up of advertising contracts of $71.2 million, ingredients of $51.1 million, equipment and machinery of $45.8 million, hops, barley and wheat totaling $44.3 million, and other commitments of $27.5 million.
T
he Company has entered into contracts for barley and wheat with 3 major suppliers. The contracts include crop year 2019 and cover the Company’s barley, wheat, and malt requirements for
2020 and part of 2021. These2021 fiscal years with the remainder extending no later than the 2026 fiscal year.
purchase commitments outstanding at March 28, 2020 totaled $13.2 million.
The Company has entered into contracts for the supply of a portion of its hops requirements. These purchase contracts extend through crop year 2025 and specify both the quantities and prices, denominated in U.S. Dollars, Euros, New Zealand Dollars, and British Pounds, to which the Company is committed. Hops purchase commitments outstanding at March 28, 2020 totaled $31.1 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.
Currently, the Company brews and packages more than 60%approximately
65
% 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
generally
supplies raw materials
and
packaging
to those brewing companies, and incurs conversion fees for labor at the time the liquid is produced and packaged.
The Company has made
payments for capital improvements at
these
third-party brewing facilities
that it expenses over the period of the contracts.
As of September 26, 2020, the Company had prepaid brewing service fees of $9.0 million in prepaid expenses and other current assets and $30.2 million in other assets, long-term. The Company plans to expense the total amount of $39.2 million over 
contract periods ending December 31, 2024. The Company is also obligated to meet annual minimum volume commitments in conjunction with certain of its production arrangements and is subject to contractual shortfall fees if these annual minimum volume commitments are not met. At September 26, 2020, if volume for the remaining term of the production arrangements were zero, the contractual shortfall fees would total $60.9 million through December 31, 2024. Based on current production volume projections, the Company believes that it will meet all annual volume commitments under these production arrangements and will not incur any shortfall fees. If future volume projections are reduced below the minimum annual volume commitments and the Company estimates that shortfall fees will be incurred, the Company will expense the estimated shortfall fees in the period when incurring the shortfall fees becomes probable.
Subsequent to September 26, 2020, the Company entered into a production arrangement with a third-party brewing company which includes
up-front
payments for capital improvements of $9.6 million and annual minimum volume commitments subject to contractual shortfall fees. The Company plans to expense the capital improvements amount of $9.6 million over the contract period ending December 31, 2026. At October 19, 2020, if volume for the remaining term of the production arrangement was zero, the contractual shortfall fees would total $10.3 million through December 31, 2026. As with its prior commitments noted above, based on current production volume projections, the Company believes that it will meet all annual volume commitments under these production arrangements and will not incur any shortfall fees.
15
Table of Contents
The Company is in the process of assessing the impact the
COVID-19
pa
nde
micpandemic will have on its future commitments and contingencies but does not believe that the future commitments will be materially adversely impacted.
Litigation
The
Company
is not a party to any pending or threatened
litigation
, the outcome of which would be expected to have a material adverse effect upon 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.
results
.
L.
L. Income Taxes
As of March 28,September 26, 2020 and December 28, 2019, the Company had approximately $0.8 million and $0.8 million, respectively, of unrecognized income tax benefits.
The Company’s practice is to classify interest and penalties related to
income
tax matters in income tax expense. As of March 28,September 26, 2020 and December 28, 2019, the Company had $0.1$0.2 million and $0.1 million, respectively, accrued for interest and penalties recorded in other liabilities.
The Internal Revenue Service completed an examination of the
Company’s
2015 consolidated corporate income tax return and issued a no change report in 2018. 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
was
not currently under any income tax audits as of March 28,September 26, 2020. In addition, the
The
Company is generally obligated to report changes in taxable income arising from federal income tax
audits.
audits.
The following table provides a summary of the income tax provision for the thirteen and thirty-nine weeks ended March 28,September 26, 2020 and March 30,September 28, 2019:
         
 
Thirteen weeks ended
 
  
March 28,
  
March 30,
 
 
2020
  
2019
 
 
(in thousands)
 
Summary of income tax provision
      
Tax provision based on net income
 $
5,005
  $
7,909
 
Benefit of ASU
2016-09
  
(2,004
)  
(1,775
)
         
Total income tax provision
 $
3,001
  $
6,134
 
         
 
   
Thirteen weeks ended
 
   
September 26,
   
September 28,
 
   
2020
   
2019
 
   
(in thousands)
 
Summary of income tax provision
    
Tax provision based on net income
  $26,325   $16,047 
Benefit of ASU
2016-09
   (5,142)    (1,842) 
  
 
 
   
 
 
 
Total income tax provision
  $21,183   $14,205 
  
 
 
   
 
 
 
 
   
Thirty-nine weeks ended
 
   
September 26,
   
September 28,
 
   
2020
   
2019
 
   
(in thousands)
 
Summary of income tax provision
    
Tax provision based on net income
  $52,029   $34,455 
Benefit of ASU
2016-09
   (9,481)    (3,870) 
  
 
 
   
 
 
 
Total income tax provision
  $42,548   $30,585 
  
 
 
   
 
 
 
The Company’s effective tax rate for the thirteen weeks ended March 28,September 26, 2020, excluding the impact of ASU
2016-09,
decreased to 23.6%20.8% from 26.5%24.1% for the
thirteen
weeks ended March 30,September 28, 2019, primarily due to
one-time
state higher tax benefits relatedbenefit from stock option activity recorded in accordance with ASU
2016-09.
The Company’s effective tax rate for the thirty-nine weeks ended September 26, 2020, decreased to capital investments.
21.1% from 24.1% for the thirty-nine weeks ended September 28, 2019, also primarily due to higher tax benefit from stock option activity recorded in accordance with ASU
2016-09.
M.
Revolving Line of Credit
 
16
 
Table of Contents
M. Revolving Line of Credit
In March 2018, the Company amended its credit facility in place that provides for a $150.0 million revolving line of credit facility to extend the scheduled expiration date to March 31, 2023. On March 12, 2020, the Company withdrew $100.0 
million of the available balance to provide flexibility and enhance its ability to address potential future uncertainties regarding the impact of the
COVID-19
pandemic. The interest rate for the borrowings withdrawn
is 1.15% (LIBOR rate of 0.70% plus 0.45%). As of March 28, 2020, the Company had not made any payments towards the borrowing. As of March 28,September 26, 2020, the Company was not in violation of any of its financial covenants to the lender under the credit facility and the unusedentire balance of $50.0$150.0 million remaining on the line of credit was available to the Company
for
future borrowing.
16
N. Fair Value Measures
Table of Contents
N.
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 following fair value hi
era
rchy,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 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 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.
•
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.
The Company’s money market funds are measured at fair value on a recurring basis (at least annually)quarterly) and are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The money market funds are invested substantially in United States Treasury and government securities. The Company does not adjust the quoted market price for such financial instruments. Cash, receivables and payables are carried at their cost, which approximates fair value, because of their short-term nature.
At March 28,September 26, 2020 and December 28, 201
9
,2019, 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 March 28,September 26, 2020 and December 
28,
,
2019,
, the Company’s cash and cash equivalents balance was $129.5$157.1 million and $36.7 million, respectively, including money market funds amounting to $128.1$152.2 million and $29.5 million,
respectively
.respectively.
O. Common Stock and Stock-Based Compensation
O.
Common Stock and Stock-Based Compensation
Option Activity
Information related to stock options under the Restated Employee Equity Incentive Plan and the Stock Option Plan for
Non-Employee
Directors is summarized as follows:
                 
 
Shares
  
Weighted-
A
verage
Exercise
 
Price
  
Weighted-Average
 
Remaining
Contractual
 
Term in
 
Years
  
Aggregate
 
Intrinsic
Value
(in
 
thousands)
 
Outstanding at December 28, 2019
  
315,678
  $
186.53
       
Granted
  
22,970
   
370.43
       
Forfeited
  
(2,595
)  
241.84
       
Expired
  
—
 
 
   
—
 
 
       
Exercised
  
(23,233
)  
103.99
       
                 
Outstanding at March 28, 2020
  
312,820
  $
205.70
   
6.08
  $
47,034
 
                 
Exercisable at March 28, 2020
  
105,636
  $
164.80
   
4.63
  $
20,091
 
                 
Vested and expected to vest at March 28, 2020
  
285,886
  $
203.74
   
6.01
  $
43,532
 
                 
 
   
Shares
   
Weighted
 
-
 
Average

Exercise Price
   
Weighted
 
-
 
Average Remaining

Contractual Term in Years
   
Aggregate 
Intrinsic
 
Value
(in thousands)
 
Outstanding at December 28, 2019
   315,678   $186.53     
Granted
   25,870    383.22     
Forfeited
   (2,595)    241.84     
Expired
   0      0       
Exercised
   (91,606)    137.55     
  
 
 
   
 
 
   
 
 
   
 
 
 
Outstanding at September 26, 2020
   247,347   $224.66    6.08   $161,050 
  
 
 
   
 
 
   
 
 
   
 
 
 
Exercisable at September 26, 2020
   59,138   $196.52    5.05   $40,170 
  
 
 
   
 
 
   
 
 
   
 
 
 
Vested and expected to vest at September 26, 2020
   223,104   $223.63    6.04   $145,495 
  
 
 
   
 
 
   
 
 
   
 
 
 
Of the total options outstanding at March 28,September 26, 2020, 42,00040,000 shares were performance-based options for which the performance criteria had yet to be achieved.
17
Table of Contents
On January 31, 2020, the Company granted options to purchase an aggregate of 978 shares of the Company’s Class A Common Stock to the Company’s
newly appointed
non-employee Director, of which all shares vest immediately.
Director. These options have a weighted average fair value of $146.87 per share of which all shares vested immediately.
.
On March 1, 2020, the Company granted
performance-based stock
options to purchase an aggregate of 14,962 shares of the Company’s Class A Common Stock to senior management with a weighted average fair value of $142.25
per share of which all shares relate to performance-based stock options.senior management.
 
17
Table of Contents
On March 2, 2020, the Company granted
performance-based stock
options to purchase an aggregate of 7,030 shares of the Company’s Class A Common Stock to the Company’s newly appointed Chief People Officer with a weighted average fair value of $142.23 per
share
of which all shares relate to performance-based stock options.the Company’s newly appointed Chief People Officer. 
On May 14, 2020, the Company granted options to purchase an aggregate of 2,900 shares of the Company’s Class A Common Stock to the Company’s
non-employee
Directors. These options have a weighted average fair value of $198.14 per share. All of the options vested immediately on the date of the grant.
Weighted average assumptions used to estimate fair values of stock options on the date of grants are as follows:
2020
 
Expected Volatility
   
2020
32.4%
Expected Volatility
  32.6%
Risk-free interest rate
  
1.15%
1.1%
Expected Dividends
  
0.0%
Exercise factor
  
2.032.1 times
Discount for post-vesting restrictions
  0.0%
0.0%
 
 
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 28, 2019
   122,142   $213.52 
Granted
   42,455    349.95 
Vested
   (45,860)    214.23 
Forfeited
   (4,488)    236.78 
  
 
 
   
Non-vested
at September 26, 2020
   114,249   $263.02 
  
 
 
   
Of the total shares outstanding at September 26, 2020, 3,000 shares were performance-based shares for which the performance criteria had yet to be achieved.
         
 
Number
 
of Shares
  
Weighted
 
Average
Fair
 
Value
 
Non-vested
at December 28, 2019
  
122,142
  $
213.52
 
Granted
  
40,316
   
318.07
 
Vested
  
(19,589
)  
187.26
 
Forfeited
  
(2,845
)  
245.17
 
         
Non-vested
at March 28, 2020
  
140,024
  $
243.80
 
         
On March 1, 2020, the Company granted 15,011 shares of restricted stock units to certain officers, senior managers and key employees,
all
of which all shares vest ratably over service periods of four years.
Additionally,
on March 1, 2020, the Company granted a combined 13,482 shares of restricted stock units to select senior management employees with various service and performance based
performance-based
vesting conditions. On March 1, 2020, employees elected to purchase 9,127 shares under the Company’s investment
share program. program,
under which shares of the Company’s Class A Common Stock are sold to employees at a discount.
The
weighted average fair value of the restricted stock units and investment shares which are sold to employees at discount under its investment share program,
was $370.79 and $169.43 per share, respectively.
On March 2,
2020,
the Company granted its newly appointed Chief People Officer 2,696 shares of restricted stock units with a weighted-average fair value of $370.79 per share with service based vesting through 2024.
On July 28, 2020, the Company granted an officer 1,842 shares of restricted stock units with a weighted-average fair value of $814.19 per share with service based vesting in 2023. Also on July 28, 2020, the Company granted a senior manager 184 shares of restricted stock units with a weighted-average fair value of $814.19 per share with service based vesting through 2024.
18
Table of Contents
On September 1, 2020, the Company granted a senior manager 113 shares of restricted stock units with a weighted-average fair value of $881.98 per share with service passed vesting through 2024.
Stock-Based Compensation
Stock-based compensation expense related to share-based awards recognized in the thirteen weeks ended March 28, 2020 and March 30, 2019 was $2.6 million and $2.1 million, respectively, and was calculated based on awards expected to
vest
.
The following table provides information regarding stock-based compensation expense included in operating expenses in the accompanying consolidated statements of comprehensive income:
P.
Employee Retirement
Plans

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
 
  
September 28,
2019
 
   
(in thousands)
   
(in thousands)
 
Amounts included in advertising, promotional and selling expenses
  $1,203   $1,180   $3,054   $2,778 
Amounts included in general and administrative expenses
   2,429    2,053    7,681    6,265 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total stock-based compensation expense
  $3,632   $3,233   $10,735   $9,043 
  
 
 
   
 
 
   
 
 
   
 
 
 
P. Employee Retirement Plans
The Company has one company-sponsored defined benefit pension plan that covers certain of its union employees. 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 No. 1199 (“Local Union 1199”). As of December 28, 2019, the fair value of the plan assets was $3.9 million and the benefit obligation was $6.7 million. 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. On May 28, 2020, the Company received a positive determination letter for the termination on the plan from the IRS. During the third party annuities.quarter of 2020, the Company completed the termination of a portion of the plan and recorded an expense of $1.5 million as a result of the termination. In the fourth quarter of 2020
,
the Company expects to complete the termination of the plan and record an additional expense of approximately $1.8$1.1 million as a result
of the termination.
Q. Related Party Transactions
Q.
Related Party Transactions
In connection with the Dogfish Head Transaction, the Company has entered into a lease with the Dogfish Head founders and other owners of buildings used in certain 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 the thirteen and thirty-nine weeks ended March 28,September 26, 2020 was approximately $91,000. $91,000 and $270,000, respectively. During the third quarter of 2020, the Company entered into an agreement to sell a boat and a car to the Dogfish Head founders at market
value
of approximately $26,000.
Additionally, the Company incurred expenses of less than $5,000$10,000 to various other suppliers affiliated with the Dogfish Head founders.
R. Subsequent Events
18As disclosed in Note K, subsequent to September 26, 2020, the Company entered into a production agreement with a third-party brewing company.
Table of Contents
R.Subsequent Events
The Company began seeing the impact of the global
COVID-19
pandemic on its business in
early
March and such impacts have continued into April. The principal impacts of the global
COVID-19
pandemic were a significant reduction in keg demand from the
on-premise
channel and higher labor and safety related costs at Company-owned breweries. The Company expects to continue to be impacted as the situation remains dynamic and subject to rapid and possibly material change. Additional impacts may arise of which the Company is not currently aware. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.
The Company evaluated subsequent events occurring after the
balance
sheet date, March 28,September 26, 2020, and concluded that there were no other events 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.
Item 2.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of the Company for the thirteen and thirty-nine week periodperiods ended March 28,September 26, 2020, as compared to the thirteen and thirty-nine week periodperiods ended March 30,September 28, 2019. This discussion should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 28, 2019.
RESULTSOF OPERATIONS
 
19
 
Table of Contents
RESULTS OF OPERATIONS
Thirteen Weeks Ended March 28,September 26, 2020 compared to Thirteen Weeks Ended March 30,September 28, 2019
                                     
 
Thirteen Weeks Ended
(in thousands, except per barrel)
       
 
March 28,
2020
  
March 30,
2019
  
Amount
change
  
% change
  
Per barrel
change
 
Barrels sold
 
1,423
  
1,076
   
347
   
32.2
%   
   
Per barrel
  
% of net
revenue
    
Per barrel
  
% of net
revenue
       
Net revenue
 $
330,565
  $
232.24
   
100.0
% $
251,651
  $
233.77
   
100.0
% $
78,914
   
31.4
% $
(1.53
)
Cost of goods
  
182,592
   
128.28
   
55.2
%  
127,111
   
118.08
   
50.5
%  
55,481
   
43.6
%  
10.20
 
                                     
Gross profit
  
147,973
   
103.96
   
44.8
%  
124,540
   
115.69
   
49.5
%  
23,433
   
18.8
%  
(11.73
)
Advertising, promotional and selling expenses
  
97,891
   
68.78
   
29.6
%  
71,723
   
66.63
   
28.5
%  
26,168
   
36.5
%  
2.15
 
General and administrative expenses
  
27,029
   
18.99
   
8.2
%  
23,374
   
21.71
   
9.3
%  
3,655
   
15.6
%  
(2.72
)
Impairment of assets
  
1,521
   
1.07
   
0.5
%  
—  
   
—  
   
0.0
%  
1,521
   
0.0
%  
1.07
 
                                     
Total operating expenses
  
126,441
   
88.83
   
38.2
%  
95,097
   
88.34
   
37.8
%  
31,344
   
33.0
%  
0.49
 
Operating income
  
21,532
   
15.13
   
6.5
%  
29,443
   
27.35
   
11.7
%  
(7,911
)  
-26.9
%  
(12.22
)
Other (expense) income, net
  
(297
)  
(0.21
)  
-0.1
%  
385
   
0.36
   
0.2
%  
(682
)  
-177.1
%  
(0.57
)
                                     
Income before income tax expense
  
21,235
   
14.92
   
6.4
%  
29,828
   
27.71
   
11.9
%  
(8,593
)  
-28.8
%  
(12.79
)
Income tax expense
  
3,001
   
2.11
   
0.9
%  
6,134
   
5.70
   
2.4
%  
(3,133
)  
-51.1
%  
(3.59
)
                                     
Net income
 $
18,234
  $
12.81
   
5.5
% $
23,694
  $
22.01
   
9.4
% $
(5,460
)  
-23.0
% $
(9.20
)
                                     
 
 
  
Thirteen Weeks Ended
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
  
September 26,
2020
 
 
September 28,
2019
 
 
Amount
change
 
 
%
change
 
 
Per barrel
change
 
Barrels sold
  
   
  
 
2,080
 
  
   
 
   
 
 
1,594
 
 
   
 
 
486
 
 
 
30.5
% 
 
   
          
 
  
 
 
  
Per barrel
 
  
% of net
revenue
 
 
 
 
 
Per barrel
 
 
% of net
revenue
 
 
 
 
 
 
 
 
 
 
Net revenue
  
$
492,792
 
  
$
236.90
 
  
 
100.0
% 
 
$
378,466
 
 
$
237.46
 
 
 
100.0
% 
 
$
114,326
 
 
 
30.2
% 
 
$
(0.56
) 
Cost of goods
  
 
252,207
 
  
 
121.24
 
  
 
51.2
% 
 
 
190,631
 
 
 
119.61
 
 
 
50.4
% 
 
 
61,576
 
 
 
32.3
% 
 
 
1.63
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
  
 
240,585
 
  
 
115.65
 
  
 
48.8
% 
 
 
187,835
 
 
 
117.85
 
 
 
49.6
% 
 
 
52,750
 
 
 
28.1
% 
 
 
(2.20
) 
Advertising, promotional and selling expenses
  
 
108,023
 
  
 
51.93
 
  
 
21.9
% 
 
 
96,570
 
 
 
60.59
 
 
 
25.5
% 
 
 
11,453
 
 
 
11.9
% 
 
 
(8.66
) 
General and administrative expenses
  
 
30,340
 
  
 
14.59
 
  
 
6.2
% 
 
 
31,429
 
 
 
19.72
 
 
 
8.3
% 
 
 
(1,089
) 
 
 
-3.5
% 
 
 
(5.13
) 
Impairment of assets
  
 
441
 
  
 
0.21
 
  
 
0.1
% 
 
 
—  
 
 
 
—  
 
 
 
0.0
% 
 
 
441
 
 
 
0.0
% 
 
 
0.21
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
  
 
138,804
 
  
 
66.73
 
  
 
28.2
% 
 
 
127,999
 
 
 
80.31
 
 
 
33.8
% 
 
 
10,805
 
 
 
8.4
% 
 
 
(13.58
) 
Operating income
  
 
101,781
 
  
 
48.93
 
  
 
20.7
% 
 
 
59,836
 
 
 
37.54
 
 
 
15.8
% 
 
 
41,945
 
 
 
70.1
% 
 
 
11.39
 
Other (expense) income, net
  
 
170
 
  
 
0.08
 
  
 
0.0
% 
 
 
(902
) 
 
 
(0.57
) 
 
 
-0.2
% 
 
 
1,072
 
 
 
-118.8
% 
 
 
0.65
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
  
 
101,951
 
  
 
49.01
 
  
 
20.7
% 
 
 
58,934
 
 
 
36.98
 
 
 
15.6
% 
 
 
43,017
 
 
 
73.0
% 
 
 
12.03
 
Income tax expense
  
 
21,183
 
  
 
10.18
 
  
 
4.3
% 
 
 
14,205
 
 
 
8.91
 
 
 
3.8
% 
 
 
6,978
 
 
 
49.1
% 
 
 
1.27
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
  
$
80,768
 
  
$
38.83
 
  
 
16.4
% 
 
$
44,729
 
 
$
28.06
 
 
 
11.8
% 
 
$
36,039
 
 
 
80.6
% 
 
$
10.77
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue.
Net revenue increased by $78.9$114.3 million, or 31.4%30.2%, to $330.6$492.8 million for the thirteen weeks ended March 28,September 26, 2020, as compared to $251.7$378.5 million for the thirteen weeks ended March 30,September 28, 2019, primarily as a result of an increase in shipments, partially offset by estimated keg returns from distributors and retailers related toshipments.
COVID-19
of $5.8 million.
Volume.
Total shipment volume increased by 32.2%30.5% to 1,423,0002,080,000 barrels for the thirteen weeks ended March 28,September 26, 2020, as compared to 1,076,0001,594,000 barrels for the thirteen weeks ended March 30,September 28, 2019, primarily due to
increases in shipments of Truly Hard Seltzer, and Twisted Tea brand products and the addition of Dogfish Head brand products, partially offset by decreases in Samuel Adams and Angry Orchard and Samuel Adams brand products.
19
Table of Contents
Depletions, or sales by distributors to retailers, of the Company’s products for the thirteen weeks ended March 28,September 26, 2020 increased by approximately 36% compared to the thirteen weeks ended March 30,September 28, 2019, primarily due to increases in depletions of Truly Hard Seltzer and Twisted Tea brand products, and the addition of Dogfish Head brand products, partially offset by decreases in Samuel Adams, Angry Orchard and Samuel AdamsDogfish Head brand products.
The Company believes distributor inventory as of March 28,September 26, 2020 averaged approximately 62 weeks on hand and was at an appropriate level based on thelower than prior year levels due to depletions outpacing supply chain capacity constraints and inventory requirements to support the forecasted growth of Truly and Twisted Tea brands over the summer.constrained shipments. The Company expects wholesaler inventory levels in terms of weeks on hand to return to more normal levels of approximatelyremain between 1 and 4 weeks on hand later infor the remainder of the year.
Net revenue per barrelbarrel.
. Net revenue per barrel decreased by 0.7%0.2% to $232.24$236.9 per barrel for the thirteen weeks ended March 28,September 26, 2020, as compared to $233.77$237.46 per barrel for the comparable period in 2019, primarily due to estimated keg returns from distributors and retailers related to COVID-19 of $5.8 million,unfavorable package mix partially offset by price increases and package mix.increases.
Cost of goods sold.
Cost of goods sold was $128.28$121.24 per barrel for the thirteen weeks ended March 28,September 26, 2020, as compared to $118.08$119.61 per barrel for the thirteen weeks ended March 30,September 28, 2019. The 2020 increase in cost of goods sold of $10.20$1.63 per barrel was primarily the result of higher processing costs due to increased production at third partythird-party breweries, and higher processing costs and finished goods keg inventory write-offs at Company-owned breweries of which $3.6 million were direct costs related to
COVID-19,
partially offset by cost saving initiatives at the Company-owned breweries.
Gross profit.
Gross profit was $103.96$115.65 per barrel for the thirteen weeks ended March 28,September 26, 2020, as compared to $115.69$117.85 per barrel for the thirteen weeks ended March 30,September 28, 2019. The decrease in gross profit per barrel of $11.73$2.20 was the result of a decrease in net revenue per barrel and an increase in cost of goods sold per barrel and a decrease in net revenue per barrel.
20
Table of Contents
The Company includes freight charges related to the movement of finished goods from its manufacturing locations to distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to those of other entities that classify costs related to distribution differently.
Advertising, promotional and selling.
Advertising, promotional and selling expenses increased by $26.2$11.4 million, or 36.5%11.9%, to $97.9$108.0 million for the thirteen weeks ended March 28,September 26, 2020, as compared to $71.7$96.6 million for the thirteen weeks ended March 30,September 28, 2019. The increase was primarily due to increased investments in media and production, and local marketing, the addition of Dogfish Head brand-related expenses beginning July 3, 2019, higherincreases in salaries and benefits costs and increased freight to distributors due to higher volumes.
Advertising, promotional and selling expenses were 29.6%21.9% of net revenue, or $68.78$51.93 per barrel, for the thirteen weeks ended March 28,September 26, 2020, as compared to 28.5%25.5% of net revenue, or $66.63$60.59 per barrel, for the thirteen weeks ended March 30,September 28, 2019. This increasedecrease per barrel is primarily due to advertising, promotional and selling expensesshipments growing at a higher rate than shipments.advertising, promotional and selling expenses. The Company invests in advertising and promotional campaigns that it believes will be effective, but there is no guarantee that such investments 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 statements of comprehensive income as reductions to advertising, promotional and selling expenses. Historically, contributions from distributors for advertising and promotional activities have amounted to between 2% and 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 industry and market conditions.
General and administrative.
General and administrative expenses decreased by $1.1 million, or 3.5%, to $30.3 million for the thirteen weeks ended September 26, 2020, as compared to $31.4 million for the thirteen weeks ended September 28, 2019. The decrease was primarily due to
one-time
Dogfish Head transaction-related expenses of $3.6 million that were incurred in the third quarter of 2019, partially offset by increases in salaries and benefits costs.
Impairment of assets.
Impairment of long-lived assets increased $0.4 million from the third quarter of 2019, primarily due write-downs of equipment at Company-owned breweries.
I
ncome tax expense.
During the thirteen weeks ended September 26, 2020, the Company recorded a net income tax expense of $21.2 million which consists of $26.3 million income tax expenses partially offset by a $5.1 million tax benefit related to stock option exercises in accordance with ASU
2016-09.
The Company’s effective tax rate for the thirteen weeks ended September 26, 2020, decreased to 20.8% from 24.1% for the thirteen weeks ended September 28, 2019, primarily due to a higher tax benefit from stock option activity recorded in accordance with ASU
2016-09.
Thirty-Nine Weeks Ended September 26, 2020 compared to Thirty-Nine Weeks Ended September 28, 2019
 
  
Thirty-nine Weeks Ended
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
  
September 26,
2020
 
 
September 28,
2019
 
 
Amount
change
 
 
%
change
 
 
Per barrel
change
 
Barrels sold
  
   
 
 
5,425
 
 
   
 
   
 
 
4,045
 
 
   
 
 
1,380
 
 
 
34.1
% 
 
   
          
 
  
 
 
 
Per barrel
 
 
% of net
revenue
 
 
 
 
 
Per barrel
 
 
% of net
revenue
 
 
 
 
 
 
 
 
 
 
Net revenue
  
$
1,275,495
 
 
$
235.12
 
 
 
100.0
% 
 
$
948,524
 
 
$
234.51
 
 
 
100.0
% 
 
$
326,971
 
 
 
34.5
% 
 
$
0.61
 
Cost of goods
  
 
677,313
 
 
 
124.86
 
 
 
53.1
% 
 
 
477,147
 
 
 
117.97
 
 
 
50.3
% 
 
 
200,166
 
 
 
42.0
% 
 
 
6.89
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
  
 
598,182
 
 
 
110.27
 
 
 
46.9
% 
 
 
471,377
 
 
 
116.54
 
 
 
49.7
% 
 
 
126,805
 
 
 
26.9
% 
 
 
(6.27
) 
Advertising, promotional and selling expenses
  
 
306,250
 
 
 
56.45
 
 
 
24.0
% 
 
 
262,372
 
 
 
64.87
 
 
 
27.7
% 
 
 
43,878
 
 
 
16.7
% 
 
 
(8.42
) 
General and administrative expenses
  
 
87,054
 
 
 
16.05
 
 
 
6.8
% 
 
 
81,552
 
 
 
20.16
 
 
 
8.6
% 
 
 
5,502
 
 
 
6.7
% 
 
 
(4.11
) 
Impairment of assets
  
 
2,796
 
 
 
0.52
 
 
 
0.2
% 
 
 
243
 
 
 
0.06
 
 
 
0.0
% 
 
 
2,553
 
 
 
1050.6
% 
 
 
0.46
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
  
 
396,100
 
 
 
73.02
 
 
 
31.1
% 
 
 
344,167
 
 
 
85.09
 
 
 
36.3
% 
 
 
51,933
 
 
 
15.1
% 
 
 
(12.07
) 
Operating income
  
 
202,082
 
 
 
37.25
 
 
 
15.8
% 
 
 
127,210
 
 
 
31.45
 
 
 
13.4
% 
 
 
74,872
 
 
 
58.9
% 
 
 
5.80
 
Other (expense) income, net
  
 
(391
) 
 
 
(0.07
) 
 
 
0.0
% 
 
 
(346
) 
 
 
(0.09
) 
 
 
0.0
% 
 
 
(45
) 
 
 
13.0
% 
 
 
0.02
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
  
 
201,691
 
 
 
37.18
 
 
 
15.8
% 
 
 
126,864
 
 
 
31.37
 
 
 
13.4
% 
 
 
74,827
 
 
 
59.0
% 
 
 
5.81
 
Income tax expense
  
 
42,548
 
 
 
7.84
 
 
 
3.3
% 
 
 
30,585
 
 
 
7.56
 
 
 
3.2
% 
 
 
11,963
 
 
 
39.1
% 
 
 
0.28
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
  
$
159,143
 
 
$
29.34
 
 
 
12.5
% 
 
$
96,279
 
 
$
23.80
 
 
 
10.2
% 
 
$
62,864
 
 
 
65.3
% 
 
$
5.54
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
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Net revenue.
Net revenue increased by $327 million, or 34.5%, to $1,275 million for the thirty-nine weeks ended September 26, 2020, as compared to $948.5 million for the thirty-nine weeks ended September 28, 2019, primarily as a result of an increase in shipments.
Volume.
Total shipment volume increased by 34.1% to 5,425,000 barrels for the thirty-nine weeks ended September 26, 2020, as compared to 4,045,000 barrels for the thirty-nine weeks ended September 28, 2019, primarily due to
increases in shipments of Truly Hard Seltzer and Twisted Tea and the addition of Dogfish Head brand products, partially offset by decreases in Samuel Adams and Angry Orchard brand products.
Depletions, or sales by distributors to retailers, of the Company’s products for the thirty-nine weeks ended September 26, 2020 increased by approximately 40% compared to the thirty-nine weeks ended September 28, 2019, primarily due to
increases in shipments of Truly Hard Seltzer and Twisted Tea and the addition of Dogfish Head brand products, partially offset by decreases in Samuel Adams and Angry Orchard brand products. Excluding the addition of the Dogfish Head brands beginning July 3, 2019, depletions increased 38% compared to the thirty-nine weeks ended September 28, 2019.
Net revenue per barrel.
Net revenue per barrel increased by 0.3% to $235.12 per barrel for the thirty-nine weeks ended September 26, 2020, as compared to $234.51 per barrel for the comparable period in 2019, primarily due to price increases partially offset by unfavorable package mix.
Cost of goods sold.
Cost of goods sold was $124.86 per barrel for the thirty-nine weeks ended September 26, 2020, as compared to $117.97 per barrel for the thirty-nine weeks ended September 28, 2019. The 2020 increase in cost of goods sold of $6.89 per barrel was primarily the result of higher processing costs due to increased production at third-party breweries and direct costs related to
COVID-19
of $7.4 million, partially offset by cost saving initiatives at the Company-owned breweries.
Gross profit.
Gross profit was $110.27 per barrel for the thirty-nine weeks ended September 26, 2020, as compared to $116.54 per barrel for the thirty-nine weeks ended September 28, 2019. The decrease in gross profit per barrel of $6.27 was the result of an increase in cost of goods sold per barrel, partially offset by an increase in net revenue per barrel.
Advertising, promotional and selling.
Advertising, promotional and selling expenses increased by $43.9 million, or 16.7%, to $306.3 million for the thirty-nine weeks ended September 26, 2020, as compared to $262.4 million for the thirty-nine weeks ended September 28, 2019. The increase was primarily due to increased investments in media and production, higher salaries and benefits costs, the addition of Dogfish Head brand-related expenses beginning July 3, 2019, and increased freight to distributors due to higher volumes.
Advertising, promotional and selling expenses were 24.0% of net revenue, or $56.45 per barrel, for the thirty-nine weeks ended September 26, 2020, as compared to 27.7% of net revenue, or $64.87 per barrel, for the thirty-nine weeks ended September 28, 2019. This decrease per barrel is primarily due to shipments growing at a higher rate than advertising, promotional and selling expenses. The Company invests in advertising and promotional campaigns that it believes will be effective, but there is no guarantee that such investments will generate sales growth.
General and administrative.
General and administrative expenses increased by $3.7$5.5 million, or 15.6%,6.7% to $27.0$87.1 million for the thirteenthirty-nine weeks ended March 28,September 26, 2020, as compared to $23.4$81.6 million for the thirteenthirty-nine weeks ended March 30,September 28, 2019. The increase was primarily due to increases in salaries and benefits costs and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019, partially offset by the Dogfish Head transaction-related fees of $5.6 million incurred in the comparable
39-week
period in 2019.
20
Table of Contents
Impairment of assets.
Impairment of long-lived assets increased $1.5by $2.6 million fromfor the first quarter of 2019,thirty-nine weeks ended September 26, 2020, as compared to the thirty-nine weeks ended September 28, 2019. This increase was primarily due to higher write-downs of brewery equipment at the Company’s Cincinnati brewery.Company-owned breweries in 2020.
I
ncome tax expense.
During the thirteenthirty-nine weeks ended March 28,September 26, 2020, the Company recorded a net income tax expense of $3.0$42.5 million which consists of $5.0$52.0 million income tax expenses partially offset by a $2.0$9.5 million tax benefit related to stock option exercises in accordance with ASU
2016-09.
The Company’s effective tax rate for the thirteenthirty-nine weeks ended March 28,September 26, 2020, excluding the impact of ASU
2016-09,
decreased to 23.6%21.1% from 26.5%24.1% for the thirteenthirty-nine weeks ended March 30,September 28, 2019, primarily due to
one-time
state a higher tax benefits related to capital investments.benefit from stock option activity recorded in accordance with ASU
2016-09.
22
LIQUIDITYAND CAPITAL RESOURCES
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $129.5$157.1 million as of March 28,September 26, 2020 from $36.7 million as of December 28, 2019, reflecting cash borrowed on the Company’s line of credit and cash provided by operating activities and proceeds from exercise of stock options and sale of investment shares, partially offset by purchases of property, plant and equipment.
Cash provided by operating activities consists of net income, adjusted for certain
non-cash
items, such as depreciation and amortization, stock-based compensation expense, 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 for the thirteenthirty-nine weeks ended March 28,September 26, 2020 was $18.9$208.9 million and primarily consisted of net income of $18.2$159.1 million and
non-cash
items of $24.8$82.7 million, partially offset by a net increase in operating assets and liabilities of $24.1$32.9 million. Cash provided by operating activities for the thirteenthirty-nine weeks ended March 30,September 28, 2019 was $13.6$142.7 million and primarily consisted of net income of $23.7$96.3 million and
non-cash
items of $17.0$68.4 million, partially offset by a net increase in operating assets and liabilities of $27.1$22.0 million.
The Company used $27.3$99.9 million in investing activities during the thirteenthirty-nine weeks ended March 28,September 26, 2020, as compared to $22.1$232.1.0 million during the thirteenthirty-nine weeks ended March 30,September 28, 2019. The decrease reflects the 2019 Dogfish Head transaction cash outflow. Investing activities primarily consisted of capital investments made mostly in the Company’s breweries to increase brewery capacity, drive efficiencies and cost reductions, and support product innovation and future growth.
Cash provided by financing activities was $101.2$11.4 million during the thirteenthirty-nine weeks ended March 28,September 26, 2020, as compared to $2.9$8.2 million provided by financing activities during the thirteenthirty-nine weeks ended March 30,September 28, 2019. The $98.3$3.2 million increase in cash provided by financing activities in 2020 from 2019 is primarily due to $100.0 million of borrowings on the Company’s line of credit to enhance its ability to address the impactimpacts of
COVID-19
pandemic.pandemic and higher proceeds from exercise of stock options and sale of investment shares, partially offset by $100.0 million in payments on the Company’s line of credit.
During the thirteenthirty-nine weeks ended March 28,September 26, 2020 and the period from March 29,September 27, 2020 through April 17,October 16, 2020 the Company did not repurchase any shares of its Class A Common Stock. As of April 17,October 16, 2020, the Company had repurchased a cumulative total of approximately 13.8 million shares of its Class A Common Stock for an aggregate purchase price of $840.7 million and had approximately $90.3 million remaining on the $931.0 million stock repurchase expenditure limit set by the Board of Directors.
The Company expects that its cash balance as of March 28,September 26, 2020 of $129.5$157.1 million, along with future operating cash flow and the unused balance of the Company’s line of credit of $50.0$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, 2023. As of the date of this filing, the Company had $100.0 million in borrowings and was not in violation of any of its covenants to the lender under the credit facility.
2020 and 2021 Outlook
Year-to-date
depletions through the fifteen
forty-two
weeks ended April 11,October 17, 2020 are estimated to have increased approximately 32%39% from the comparable period in 2019. Excluding the Dogfish headHead impact, depletions increased 37%.
The Company is currently estimating 2020 depletions and shipments growth of between 37% and 42%, an increase from the previously communicated estimate of between 27% and 35%, of which between 1% and 2% is due to the addition of Dogfish Head. The Company is targeting national price increases of between 1% and 2%. Full-year 2020 gross margins are currently expected to be between 46% and 47%, a narrowing down of the previously communicated estimate of between 46% and 48%. The Company intends to increase full-year 2020 advertising, promotional and selling expenses by between $55 million and $65 million, a change from the previously communicated estimate of between $70 million and $80 million primarily due to lower selling expenses. This does not include any changes in freight costs for the shipment of products to Distributors. The Company intends to increase its investment in its brands in 2020, 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 began seeingcurrently projects
Non-GAAP
earnings per diluted share, which excludes the impact of theASU
COVID-192016-09,
pandemic on its business in early March. Prior to then,for 2020 of between $14.00 and $15.00, an increase from the previously communicated estimate of between $11.70 and $12.70, but actual results could vary significantly from this target. The Company was on track to maintain its financial guidance forestimates a full-year fiscal 2020. Given2020
Non-GAAP
effective tax rate of approximately 26%, which excludes the many rapidly changing variables related to the pandemic, at this time the Company is not in a position to accurately forecast the future impactsimpact of ASU
2016-09.
Non-GAAP
earnings per diluted share and is withdrawing its full-year fiscal 2020 financial guidance.
Non-GAAP
21
23
Table of Contents
THEPOTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
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 a 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 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 of those options when 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.
The Company is completing its 2021 planning process and will provide further detailed guidance when the Company presents its full-year 2020 results. The Company is currently using the following preliminary assumptions and targets for 2021. The Company is forecasting depletion and shipment percentage growth of between 35% and 45%. The Company is targeting national price increases of between 1% and 2%. Full-year 2021 gross margins are currently expected to be between 46% and 48%. The Company intends to increase advertising, promotional and selling expenses between $130 million and $150 million for the full year 2021, not including any changes in freight costs for the shipment of products to distributors. The Company intends to increase its investment in its brands in 2021 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 2020
Non-GAAP
effective tax rate of approximately 26%, excluding the impact of ASU
2016-09.
The Company is continuing to evaluate 2020 capital expenditures. Its current estimates are between $160 million and $190 million, a change from the previously communicated estimate of between $180 million and $200 million, most of which relates to investments in the Company’s breweries. The Company estimates full-year 2021 capital spending of between $300 million and $400 million. The actual total amount spent on 2020 and 2021 capital expenditures may well be different from these estimates.
THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance
Off-balance
Sheet Arrangements
At March 28,September 26, 2020, the Company did not have
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K.
Contractual Obligations
ContractualObligations
There were no material changes outside of the ordinary course of the Company’s business to contractual obligations during the three-month period ended March 28,September 26, 2020.
Critical Accounting Policies
CriticalAccounting Policies
There were no material changes to the Company’s critical accounting policies during the three-month period ended March 28,September 26, 2020.
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKINGSTATEMENTS
In this Quarterly Report on Form
10-Q
and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the 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 subsequent events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include the factors set forth below in addition to the other information set forth in this Quarterly Report on Form
10-Q
and in the section titled “Risk Factors” in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK24
Table of Contents
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 28, 2019, there have been no significant changes in the Company’s exposures to interest rate or foreign currency rate fluctuations. The Company currently does not enter into derivatives or other market risk sensitive instruments for the purpose of hedging or for trading purposes.
Item 4.
Item 4. CONTROLS AND PROCEDURES
As of March 28,September 26, 2020, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule
13a-15(e)
and
15d-15(e)
of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e)
and
15d-15(e))
were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As a result of the
COVID-19
pandemic, certain employees of the Company began working remotely in March 2020 but these changes to the working environment did not have a material effect on the Company’s internal control over financial reporting. There was no other change in the Company’s internal control over financial reporting that occurred during the thirteenthirty-nine weeks ended March 28,September 26, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II.
22
Table of Contents
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 1.
LEGAL PROCEEDINGS
During the thirteenthirty-nine weeks ended March 28,September 26, 2020, there were no material changes to the disclosure made in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019.
Item 1A.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form
10-K
are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition and/or operating results. There has been no material change in the risk factors described in the Company’s Annual Report on Form
10-K
for the year ended December 28, 2019, with the exception of the addition of the following risk factor:factors:
The Global
COVID-19
Pandemic Has Disrupted the Company’s Business and the Company’s Financial Condition and Operating Results Have Been and Are Expected To Continue to be Adversely Affected by the Outbreak and Its Effects.
The Company’s operations and business hashave been negatively affected and could continue to be materially and adversely affected by the
COVID-19
pandemic and related weak, or weakening of, economic or other negative conditions, particularly in the United States where the Company derives most of its revenue and profit, but also in Europe, where some of the Company’s ingredient suppliers are located. National, state and local governments have responded to the
COVID-19
pandemic in a variety of ways, including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limit operations or people to stay at home. Although the Company has been permitted to continue to operate its breweries in all of the jurisdictions in which it operates, there is no assurance that the Company will be permitted to operate these facilities under every future
25
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government order or other restriction and in every location or that the third partythird-party breweries on which the Company relies for production will similarly be permitted to continue to operate. In particular, any limitations on, or closures of, the Company’s Pennsylvania, Cincinnati or Milton breweries or its third partythird-party breweries, could have a material adverse impact on the Company’s ability to manufacture products and service customers and could have a material adverse impact on the Company’s business, financial condition and results of operations.
During the first quarter of fiscalthirty-nine weeks ended September 26, 2020, the principal impacts of the global
COVID-19
pandemic were a significant reduction in keg demand from the
on-premise
channel and higher labor and safety related costs at Company-owned breweries. The Company expects to continue to be impacted as the situation remains dynamic and subject to rapid and possibly material change. Continued or additional disruptions to the Company’s business and potential associated impacts to the Company’s financial condition and results of operations include, but are not limited to:
reduced demand for the Company’s products, due to adverse and uncertain economic conditions, such as increased unemployment, a prolonged downturn in economic growth and other financial hardships, or a decline in consumer confidence, as a result of health concerns;
 
unpredictable drinker behaviors and reduced demand for the Company’s products, due to
on-premise
closures, government quarantines and other restrictions on social gatherings;
 
inability to manufacture and ship the Company’s products in quantities necessary to meet drinker demand and achieve planned shipment and depletion targets due to disruptions at the Company-owned breweries and third partythird-party breweries caused by:
 
the Company’s inability to maintain a sufficient workforce at Company-owned breweries due to the health-related effects of
COVID-19
and similar staffing issues at third partythird-party breweries;
 
disruptions at the Company-owned breweries and third partythird-party breweries caused by an inability to maintain a sufficient quantity of essential supplies, such as ingredients and packaging materials, and maintain logistics and other manufacturing and supply chain capabilities necessary for the manufacture and distribution of the Company’s products;
 
failure of third parties on which the Company relies, including the Company’s inventory suppliers, third partythird-party breweries, distributors, and logistics and transportation providers, to continue to meet on a timely basis their obligations to the Company, which may be caused by their own financial or operational difficulties;
 
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potential incremental costs associated with mitigating the effects of the pandemic on the Company’s operations, including increased labor, freight and logistics costs and other expenses; or
 
significant changes in the conditions in markets in which the Company produces, sells or distributes Company products, including prolonged or additional quarantines, governmental and regulatory actions, closures or other restrictions that limit or close the Company’s operating and manufacturing facilities, restrict the ability of the Company’s employees to perform necessary business functions, restrict or prevent consumers access to the Company products, or otherwise prevent the Company’s third-parties from sufficiently staffing operations, including operations necessary for the production, distribution, sale and support of Company products.
These impacts could place limitations on the Company’s ability to operate effectively and could have a material and adverse effect on the Company’s operations, financial condition and operating results. The Company has implemented policies and procedures at its Company-owned breweries to address potential risks, including entrance screening and temperature checks, face mask requirements, reorganizing work to increase social distancing between and among shifts, and adding two hours of workspace cleaning per shift. As the situation continues to evolve and more information and guidance becomes available, the Company may adjust its current policies and procedures, so as to address the rapidly changing variables related to the pandemic. Additional impacts may arise, of which the Company is not currently aware. The nature and extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted.
Item 2. The Company May Not Be Able to Increase Supply to meet the Increased Demand for Its Products.
Since 2017, demand for the Company’s products has grown significantly. Depletions volume increased 13% in fiscal year 2018 and 22% in fiscal year 2019. The Company currently estimates depletion growth in fiscal year 2020 to be between 37% and 42% and depletion growth in 2021 to be between 35% and 45%. These estimated increases would result in 2021 depletion volume at over 2.5 times 2017 volumes.

As demand for its products has grown, the Company has faced increasing challenges in meeting that demand. The challenges have been both production constraints, primarily resulting from canning and variety pack capacity limitations, and can and bottle supply constraints. The Company has also become more reliant on third party-owned breweries, particularly City Brewing LLC, to meet demand as the percentage of its volume produced at Company owned breweries has decreased from over 90% in 2017 to approximately 65% for the nine months ended September 26, 2020 with a further decrease anticipated in 2021. The Company’s reliance on production at City Brewing Company, LLC to meet demand has grown from 23% of the Company’s total production volume in 2019 to 33% for the nine months ended September 26, 2020.
The Company’s ability to grow and continue to meet increasing consumer demand will be affected by
its ability to meet production goals and/or targets at the Company’s owned breweries and third party-owned breweries;
its ability to enter into new brewing contracts with third party-owned breweries on commercially acceptable terms;
disruption or other operating performance issues at the Company’s owned breweries or limits on the availability of suitable production capacity at third party-owned breweries; and
its ability to obtain sufficient quantities of certain packaging materials, such as cans and bottles, from suppliers.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company May Not Be Able to Increase Supply to meet the Increased Demand for Its Products.
Since 2017, demand for the Company’s products has grown significantly. Depletions volume increased 13% in fiscal year 2018 and 22% in fiscal year 2019. The Company currently estimates depletion growth in fiscal year 2020 to be between 37% and 42% and depletion growth in 2021 to be between 35% and 45%. These estimated increases would result in 2021 depletion volume at over 2.5 times 2017 volumes.
During 2020 and 2019 the Company has had supply constraints primarily resulting from canning and variety pack capacity limitations and can and bottle supply constraints. The Company’s future growth may be limited by its ability to meet production goals and/or targets at the Company’s owned breweries and third party-owned breweries, its ability to enter into new brewing contracts with third party-owned breweries on commercially acceptable terms, disruption or operating performance issues at the Company’s owned breweries or limits on the availability of suitable production capacity at third party-owned breweries, and its ability to obtain sufficient quantities of certain packaging materials, such as cans and bottles, from suppliers.
As of April 17,October 16, 2020, the Company had repurchased a cumulative total of approximately 13.8 million shares of its Class A Common Stock for an aggregate purchase price of $840.7 million and had $90.3 million remaining on the $931.0 million share buyback expenditure limit set by the Board of Directors. During the thirteenthirty-nine weeks ended March 28,September 26, 2020, the Company did not repurchase any shares of its Class A Common Stock under the previously announced repurchase program.
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During the thirteenthirty-nine weeks ended March 28,September 26, 2020, the Company repurchased 225472 shares of its Class A Common Stock, of which all represent repurchases of unvested investment shares issued under the Investment Share Program of the Company’s Employee Equity Incentive Plan, 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 29, 2020 to February 1, 2020
  
167
  $
132.37
   
—  
  $
90,335
 
February 2, 2020 to February 29, 2020
  
—  
   
—  
   
—  
   
90,335
 
March 1, 2020 to March 28, 2020
  
58
   
105.56
   
—  
   
90,335
 
                 
Total
  
225
  $
125.46
   
—  
   
90,335
 
                 
 
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 29, 2020 to February 1, 2020
   167   $132.37    —     $90,335 
February 2, 2020 to February 29, 2020
   —      —      —      90,335 
March 1, 2020 to March 28, 2020
   58    105.56    —      90,335 
March 29, 2020 to May 2, 2020
   59    145.01    —      90,335 
May 3, 2020 to May 30, 2020
   —      —      —      90,335 
May 31, 2020 to June 27, 2020
   31    187.54    —      90,335 
June 28, 2020 to August 1, 2020
   —      —      —      90,335 
August 2, 2020 to August 29, 2020
   131    160.57    —      90,335 
August 30, 2020 to September 26, 2020
   26    145.14    —      90,335 
  
 
 
     
 
 
   
Total
   472   $135.23    —      90,335 
  
 
 
     
 
 
   
As of April 17,October 16, 2020, the Company had 9.79.9 million shares of Class A Common Stock outstanding and 2.52.3 million shares of Class B Common Stock outstanding.
Item 3.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable
Item 5.
Item 5. OTHER INFORMATION
Not Applicable
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Item 6.
Item 6. EXHIBITS
Exhibit No.
 
Title
**10.1 
**10.1
Registration Rights Agreement with the Stockholders named therein, dated July 3, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the period ended June 29, 2019, filed on July 25, 2019).
**10.2 
**10.2
Indemnification Agreement with the Dogfish Head Founders, dated July 3, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the period ended June 29, 2019, filed on July 25, 2019).
**10.3 
**10.3
Employment Agreement with Sam A. Calagione III, Dogfish Head Brewer and Founder, dated July 3, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q for the period ended June 29, 2019, filed on July 25, 2019).
**10.4 
**10.4
Coworker Agreement with George Pastrana, President – Dogfish Head, dated July 3, 2019 (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q for the period ended June 29, 2019, filed on July 25, 2019).
**10.5 
**10.5
Offer Letter to Lesya Lysyj, Chief Marketing Officer, dated March 21, 2019 (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the period ended June 29, 2019, filed on July 25, 2019).
**10.6Offer Letter to Carolyn O’Boyle, Chief People Officer, dated February 7, 2020 (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q for the period ended June 27, 2020, filed on July 23, 2020).
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Table of Contents
  *31.1 
*31.1
Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  *31.2 
*31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  *32.1 
*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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*101.SCH 
*101.SCH
XBRL Taxonomy Extension Schema Document
*101.CAL 
*101.CAL
XBRL Taxonomy Calculation Linkbase Document
*101.LAB 
*101.LAB
XBRL Taxonomy Label Linkbase Document
*101.PRE 
*101.PRE
XBRL Taxonomy Presentation Linkbase Document
*101.DEF 
*101.DEF
XBRL Definition Linkbase Document
*104 
*104
The cover page from this Quarterly Report on Form
10-Q
for the quarter ended March 28,June 27, 2020, formatted in Inline XBRL (formatted as Inline XBRL and contained in Exhibit 101).
 
*
Filed with this report
**
Designates management contract or compensatory plan or arrangement
 
25
28
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form
10-Q
to be signed on its behalf by the undersigned thereunto duly authorized.
 
THE BOSTON BEER COMPANY, INC.
(Registrant)
Date: AprilOctober 22, 2020
 
/s/ David A. Burwick
 
David A. Burwick
 
President and Chief Executive Officer
 
(principal executive officer)
Date: AprilOctober 22, 2020
 
/s/ Frank H. Smalla
 
Frank H. Smalla
 
Chief Financial Officer
 
(principal financial officer)
 
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