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BOSTON BEER CO INC - Quarter Report: 2020 June (Form 10-Q)

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 June 27, 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
 
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. $0.01 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  
☒            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
 
 
 
 
Accelerated filer
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
 
 
Smaller 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 July 17, 2020:
 
Class A Common Stock, $.01 par value
  
 
9,901,752
 
Class B Common Stock, $.01 par value
  
 
2,307,983
 
(Title of each class)
  
 
(Number of shares
 
 
 

Table of Contents
THE BOSTON BEER COMPANY, INC.
FORM
10-Q
June 27, 2020
TABLE OF CONTENTS
 
PART I.
 
  
 
PAGE
 
       
 
 
Item 1.
  
  
 
3
 
       
 
 
 
  
  
 
3
 
       
 
 
 
  
  
 
4
 
       
 
 
 
  
  
 
5
 
       
 
 
 
  
  
 
6
 
       
 
 
 
  
  
 
7-19
 
       
 
 
Item 2.
  
  
 
19-24
 
       
 
 
Item 3.
  
  
 
24
 
       
 
 
Item 4.
  
  
 
24
 
     
PART II.
 
  
     
       
 
 
Item 1.
  
  
 
25
 
       
 
 
Item 1A.
  
  
 
25
 
       
 
 
Item 2.
  
  
 
26
 
       
 
 
Item 3.
  
  
 
26
 
       
 
 
Item 4.
  
  
 
26
 
       
 
 
Item 5.
  
  
 
26
 
       
 
 
Item 6.
  
  
 
27
 
   
  
 
28
 
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)
 
June 27,
2020
 
 
December 28,
2019
 
Assets
 
 
 
 
 
 
 
Current Assets:
   
     
 
Cash and cash equivalents
  $
86,716
    $
36,670
 
Accounts receivable
   
99,320
     
54,404
 
Inventories
   
108,523
     
106,038
 
Prepaid expenses and other current assets
   
22,693
     
12,077
 
Income tax receivable
   
3,435
     
9,459
 
                 
Total current assets
   
320,687
     
218,648
 
                 
Property, plant and equipment, net
   
565,265
     
541,068
 
Operating
right-of-use
assets
   
61,420
     
53,758
 
Goodwill
   
112,529
     
112,529
 
Intangible assets
   
104,096
     
104,272
 
Other assets
   
44,255
     
23,782
 
                 
Total assets
  $
 
1,208,252
    $
 1,054,057
 
                 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current Liabilities:
   
     
 
Accounts payable
  $
93,576
    $
76,374
 
Accrued expenses and other current liabilities
   
118,788
     
99,107
 
Current operating lease liabilities
   
7,444
     
5,168
 
                 
Total current liabilities
   
219,808
     
180,649
 
 
 
 
 
 
 
 
 
 
Deferred income taxes, net
   
87,417
     
75,010
 
Non-current
operating lease liabilities
   
62,896
     
53,940
 
Other liabilities
   
10,648
     
8,822
 
                 
Total liabilities
   
380,769
     
318,421
 
Commitments and Contingencies (See Note K)
   
     
 
                 
Stockholders’ Equity:
   
     
 
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,834,473 and 9,370,526 issued and outstanding as of June 27, 2020 and December 28, 2019, respectively
   
98
     
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 June 27, 2020 and December 28, 2019, respectively
   
23
     
27
 
Additional
paid-in
capital
   
585,327
     
571,784
 
Accumulated other comprehensive loss, net of tax
   
(1,740
)    
(1,669
)
Retained earnings
   
243,775
     
165,400
 
                 
Total stockholders’ equity
   
827,483
     
735,636
 
                 
Total liabilities and stockholders’ equity
  $
1,208,252
    $
 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
   
Twenty-six weeks ended
 
 
June 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
Revenue
  $
481,089
    $
338,643
    $
833,314
    $
606,202
 
Less excise taxes
   
28,951
     
20,236
     
50,611
     
36,144
 
                                 
Net revenue
   
452,138
     
318,407
     
782,703
     
570,058
 
Cost of goods sold
   
242,514
     
159,405
     
425,106
     
286,516
 
                                 
Gross profit
   
209,624
     
159,002
     
357,597
     
283,542
 
Operating expenses:
   
     
     
     
 
Advertising, promotional and selling expenses
   
100,336
     
94,079
     
198,227
     
165,802
 
General and administrative expenses
   
29,685
     
26,748
     
56,714
     
50,122
 
Impairment of assets
   
834
     
243
     
2,355
     
243
 
                                 
Total operating expenses
   
130,855
     
121,070
     
257,296
     
216,167
 
                                 
Operating income
   
78,769
     
37,932
     
100,301
     
67,375
 
Other (expense) income, net:
   
     
     
     
 
Interest (expense) income, net
   
(212
)    
(27
)    
(149
)    
610
 
Other (expense) income, net
   
(52
)    
197
     
(412
)    
(55
)
 
                                 
Total other (expense) income, net
   
(264
)    
170
     
(561
)    
555
 
                                 
Income before income tax provision
   
78,505
     
38,102
     
99,740
     
67,930
 
Income tax provision
   
18,364
     
10,246
     
21,365
     
16,380
 
                                 
Net income
  $
60,141
    $
27,856
    $
78,375
    $
51,550
 
                                 
Net income per common share - basic
  $
4.93
    $
2.39
    $
6.44
    $
4.42
 
                                 
Net income per common share - diluted
  $
4.88
    $
2.36
    $
6.37
    $
4.38
 
                                 
Weighted-average number of common shares - Class A basic
   
9,720
     
8,648
     
9,572
     
8,627
 
                                 
Weighted-average number of common shares - Class B basic
   
2,400
     
2,918
     
2,523
     
2,918
 
                                 
Weighted-average number of common shares - diluted
   
12,258
     
11,684
     
12,221
     
11,660
 
                                 
Net income
  $
60,141
    $
27,856
    $
78,375
    $
51,550
 
                                 
Other comprehensive income:
   
     
     
     
 
Foreign currency translation adjustment
   
(13
)    
5
     
(71
)    
42
 
                                 
Comprehensive income
  $
60,128
    $
27,861
    $
78,304
    $
51,592
 
                                 
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 and
twenty-six
weeks ended June 27, 2020 and June 29, 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, 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
 
                                                                 
 
 
 
 
 
 
 
 
 
 
 
                                                                 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
Twenty-six weeks ended
 
 
June 27,
2020
 
 
June 29,
2019
 
Cash flows provided by operating activities:
   
     
 
Net income
  $
78,375
    $
51,550
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Depreciation and amortization
   
32,584
     
26,089
 
Impairment of assets
   
2,355
     
243
 
Loss on disposal of property, plant and equipment
   
39
     
104
 
Change in ROU assets
   
3,649
     
1,789
 
Credit loss expense
   
375
     
(1
)
Stock-based compensation expense
   
7,103
     
5,810
 
Deferred income taxes
   
12,407
     
6,283
 
Changes in operating assets and liabilities:
   
     
 
Accounts receivable
   
(45,326
)    
(35,346
)
Inventories
   
(12,795
)    
(14,942
)
Prepaid expenses, income tax receivable and other current assets
   
(4,784
)    
(6,855
)
Other assets
   
(10,231
)    
(4,107
)
Accounts payable
   
19,560
     
26,320
 
Accrued expenses and other current liabilities
   
20,803
     
(101
)
Change in operating lease liability
   
(80
)
 
 
   
(1,391
)
Other liabilities
   
(23
)    
85
 
                 
Net cash provided by operating activities
   
104,011
     
55,530
 
                 
Cash flows used in investing activities:
   
     
 
Purchases of property, plant and equipment
   
(60,072
)    
(44,578
)
Proceeds from disposal of property, plant and equipment
   
45
     
179
 
Investment in Dogfish Head, net of cash acquired
   
—  
     
(158,402
)
Other investing activities
   
260
     
(188
)
                 
Net cash used in investing activities
   
(59,767
)    
(202,989
)
                 
Cash flows provided by financing activities:
   
     
 
Proceeds from exercise of stock options and sale of investment shares
   
8,010
     
4,692
 
Net cash paid on note payable and finance leases
   
(649
)    
(115
)
Cash borrowed on line of credit
   
100,000
     
86,000
 
Cash paid on line of credit
   
(100,000
)    
(48,500
)
Payment of tax withholdings on stock-based payment awards and investment shares
   
(1,559
)    
—  
 
                 
Net cash provided by financing activities
   
5,802
     
42,077
 
                 
Change in cash and cash equivalents
   
50,046
     
(105,382
Cash and cash equivalents at beginning of year
   
36,670
     
108,399
 
                 
Cash and cash equivalents at end of period
  $
86,716
    $
3,017
 
                 
Supplemental disclosure of cash flow information:
   
     
 
Income taxes paid
  $
2,929
    $
207
 
                 
Cash paid for amounts included in measurement of lease liabilities
   
     
 
Operating cash flows from operating leases
  $
4,532
    $
1,916
 
                 
Operating cash flows from finance leases
  $
75
    $
52
 
                 
Financing cash flows from finance leases
  $
581
    $
7
 
                 
Right-of-use
assets obtained in exchange for operating lease obligations
  $
11,311
    $
38,524
 
 
               
Right-of-use
assets obtained in exchange for finance lease obligations
  $
3,856
    $
2,837
 
 
               
Change in purchase of property, plant and equipment in accounts payable and accrued expenses
  $
4,920
    $
1,484
 
                 
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
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
®
”, “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 June 27, 2020, and the consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the interim periods ended June 27, 2020 and June 29, 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 June 27, 2020 and the results of its consolidated operations, stockholders’ equity, and cash flows for the interim periods ended June 27, 2020 and June 29, 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
The Company began seeing the impact of the
COVID-19
pandemic on its business in early March. The direct financial impact of the pandemic has primarily shown in significantly reduced keg demand from the
on-premise
channel and higher labor and safety related costs at the Company’s breweries. In the first half of 2020, the Company recorded
COVID-19
related
pre-tax
reductions in net revenue and increases in other costs that total $14.1 million of which $10.0 million was recorded in the first quarter and $4.1 million was recorded in the second quarter. The total amount consists of a $5.8 million reduction in net revenue for estimated keg returns from distributors and retailers and $8.3 million for inventory write-downs for obsolescence, increased costs for health and safety, increased salaries and benefits and other
COVID-19
related direct costs, of which $5.6 million are recorded in cost of goods sold and $2.7 million are recorded in operating expenses. While the duration of the disruption and related impact on the Company’s consolidated financial statements is currently uncertain, the Company expects to continue to incur increased costs related to health and safety and salaries and benefits for the foreseeable future.
 
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 value of the Transaction is estimated to be $317.7 million. The following table summarizes the acquisition date fair value of the tangible assets, intangible assets, liabilities assumed, and related goodwill acquired from Dogfish Head, as well as the allocation of purchase price paid:
 
Total (In Thousands)
 
Cash and cash equivalents
  $
7,476
 
Accounts receivable
   
8,081
 
Inventories
   
9,286
 
Prepaid expenses and other current assets
   
847
 
Property, plant and equipment
   
106,964
 
Goodwill
   
108,846
 
Brand
   
98,500
 
Other intangible assets
   
3,800
 
Other assets
   
378
 
         
Total assets acquired
   
344,178
 
         
Accounts payable
   
3,861
 
Accrued expenses and other current liabilities
   
4,085
 
Deferred income taxes
   
18,437
 
Other liabilities
   
59
 
         
Total liabilities assumed
   
26,442
 
         
Net assets acquired
  $
 317,736
 
         
Cash consideration
  $
 172,993
 
Nominal value of equity issued
   
162,999
 
Fair Value reduction due to liquidity
   
(18,256
)
         
Estimated total purchase price
  $
 317,736
 
         
The Company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of Dogfish Head based on their fair values as of the Transaction closing date.
 
The 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 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.
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.
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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) 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.
  (i
ii
)
The tax effects of the pro forma adjustments at an estimated statutory rate of 25.6%.
  (
i
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
   
Twenty-six
weeks ended
 
 
June 27,
 
 
June 29,
 
 
June 27,
 
 
June 29,
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
(in thousands)
   
(in thousands)
 
Net revenue
  $ 452,138     $ 347,015     $ 782,703     $ 623,755  
Net income
  $ 60,141     $ 30,359     $ 78,375     $ 55,022  
Basic earnings per share
  $ 4.93     $ 2.51     $ 6.44     $ 4.55  
Diluted earnings per share
  $ 4.88     $ 2.46     $ 6.37     $ 4.48  
D.
Goodwill and Intangible Assets
There were no changes in the carrying value of goodwill during the thirteen or
twenty-six
weeks ended June 27, 2020 and June 29, 2019.
The Company’s intangible assets as of June 27, 2020 and December 28, 2019 were as follows:
   
 
 
As of June 27, 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
    $
 (253
)   $
3,547
    $
3,800
    $
 (127
)   $
3,673
 
Trade Names
 
 
Indefinite
 
   
100,549
     
—  
     
100,549
     
100,599
     
—  
     
100,599
 
   
 
 
 
                                               
Total intangible assets
 
 
 
  $
 104,349
    $
 (253
)   $
104,096
    $
 104,399
    $
 (127
)   $
 104,272
 
   
 
 
 
                                               
As disclosed within Note C, the Company acquired intangible assets as part of the Dogfish Head
t
ransaction that consists of $98.5 million for the value of the Dogfish Head brand name and $3.8 million for the value of customer relationships. The customer relationship intangible will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the thirteen and
twenty-six
weeks ended June 27, 2020 was approximately $63,000 and $126,000, respectively. The Company expects to record amortization expense as follows over the remaining current year and the five subsequent years:
Fiscal Year
 
Amount (in thousands)
 
Remainder of 2020
  $
 127
 
2021
   
253
 
2022
   
253
 
2023
   
253
 
2024
   
253
 
2025
   
253
 
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Table of Contents
E.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
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 its annual goodwill impairment assessment during the third quarter. The Company does not expect the adoption of ASU
2017-04
to have a material impact on its consolidated financial statements.
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
During the
twenty-six
weeks ended June 27, 2020 and June 29, 2019 approximately 95% of the Company’s revenue was from shipments of its products to domestic distributors, 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 June 27, 2020 and December 28, 2019, the Company has deferred $9.0 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 $20.4 million and $28.6 million for the thirteen and
twenty-six
weeks ended June 27, 2020, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue and were $13.5 million and $19.7 million for the thirteen and
twenty-six
weeks ended June 29, 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
,
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Table of Contents
based on the nature of the expenditure. Customer incentives and other payments made to distributors are primarily based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to
point-of-sale
and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment.
 
Amounts paid to customers in connection with these programs for the thirteen and
twenty-six
weeks ended June 27, 2020 were $5.0 million and $9.5 million, respectively. For the thirteen and
twenty-six
weeks ended June 27, 2020, the Company recorded certain of these costs in the total amount of $4.8 million and $9.0 million, respectively as reductions to net revenue. Amounts paid to customers in connection with these programs for the thirteen and
twenty-six
weeks ended June 29, 2019 were $5.9 million and $10.6 million, respectively. For the thirteen and
twenty-six
weeks ended June 29, 2019, the Company recorded certain of these costs in the total amount of $3.6 million and $6.7 million, respectively as reductions to net revenue. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at 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 Consolidation Appropriations Act, 2020 extended 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 $3.2 million and $2.1 million for the thirteen weeks ended June 27, 2020 and June 29, 2019, respectively, as a result of the Tax Cuts and Jobs Act of 2017. The Company benefited from a reduction in federal excise taxes of $5.7 million and $3.8 million for the
twenty-six
weeks ended June 27, 2020 and June 29, 2019 respectively, as a result of the Tax Cuts and Jobs Act of 2017.
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 June 27, 2020, the Company had accrued federal excise taxes of $29.8 million in accrued expenses and other current liabilities, of which will be fully paid during the third quarter of 2020.
The Company believes distributor inventory as of June 27, 2020 averaged approximately 2.5 weeks on hand and was lower than prior year levels due to supply chain capacity constraints. The Company expects wholesaler inventory levels in terms of weeks on hand to remain lower than prior year levels for the remainder of the year.
 
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:
 
June 27,
2020
 
 
December 28,
2019
 
 
(in thousands)
 
Current inventory:
 
 
 
 
 
 
Raw materials
 
$
62,475
 
 
$
61,522
 
Work in process
 
 
15,161
 
 
 
12,631
 
Finished goods
 
 
30,887
 
 
 
31,885
 
 
 
 
 
 
 
 
 
 
Total current inventory
 
 
108,523
 
 
 
106,038
 
Long term inventory
 
 
20,358
 
 
 
10,048
 
 
 
 
 
 
 
 
 
 
Total inventory
 
$
128,881
 
 
$
 116,086
 
 
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Table of Contents
H.
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 June 27, 2020, and December 28, 2019 total ROU assets and lease liabilities were as follows:
 
Classification
 
Leases
 
 
 
June 27,
2020
 
 
December 28,
2019
 
 
 
(in thousands)
 
Right-
of-use
 assets
 
 
 
 
 
 
 
Operating lease assets
 
Operating
right-of-use
assets
  $
61,420
    $
 53,758
 
Finance lease assets
 
Property, plant and equipment, net
   
5,814
     
2,531
 
                     
Lease Liabilities
 
 
 
 
 
 
 
Current
 
   
     
 
Operating lease liabilities
 
Current operating lease liabilities
   
7,444
     
5,168
 
Finance lease liabilities
 
Accrued expenses and other current liabilities
   
1,807
     
546
 
Non-current
 
   
     
 
Operating lease liabilities
 
Non-current
operating lease liabilities
   
62,896
     
53,940
 
Finance lease liabilities
 
Other liabilities
   
4,056
     
2,042
 
The gross value and accumulated depreciation of ROU assets related to finance leases as of June 27, 2020 and December 28, 2019 were as follows:
 
 
Finance Leases
 
 
June 27,
2020
 
 
December 28,
2019
 
 
(in thousands)
 
Gross value
  $
6,694
    $
2,837
 
 
Accumulated amortization
   
(880
)    
(306
)
                 
Carrying value
  $
5,814
    $
2,531
 
                 
Components of lease cost for the thirteen and
twenty-six
weeks ended June 27, 2020 and June 29, 2019 were as follows:
 
Lease Cost
 
 
Thirteen weeks ended
   
Twenty-six
 weeks ended
 
    
June 27,
    
June 29,
    
June 27,
    
June 29,
 
    
2020
    
2019
    
2020
    
2019
 
 
(in thousands)
   
(in thousands)
 
Operating lease cost
  $
 2,437
    $
 1,177
    $
 4,852
    $
 2,305
 
Variable lease costs not included in liability
   
487
     
273
     
972
     
472
 
                                 
Finance lease cost:
   
     
     
     
 
Amortization of
right-of-use
asset
   
440
     
43
     
573
     
43
 
Interest on lease liabilities
   
53
     
52
     
75
     
52
 
                                 
Total finance lease cost
  $
493
    $
95
    $
648
    $
95
 
 
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Table of Contents
Maturities of lease liabilities as of June 27, 2020 were as follows:
 
Operating
Leases
 
 
Finance

Leases
 
 
Weighted-Average Remaining Term
 
in Years
 
Operating Leases
 
 
Finance Leases
 
 
(in thousands)
   
 
 
 
2020
  $
4,843
    $
987
     
     
 
2021
   
9,903
     
1,982
     
     
 
2022
   
9,761
     
1,982
     
     
 
2023
   
9,709
     
965
     
     
 
2024
   
9,470
     
265
     
     
 
Thereafter
   
39,523
     
23
     
     
 
                                 
Total lease payments
   
83,209
     
6,204
     
     
 
Less imputed interest (based on 3.5%
weighted-average discount rate)
   
(12,869
)    
(341
)    
     
 
                                 
Present value of lease liability
  $
70,340
    $
5,863
     
9.3
     
3.2
 
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.
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 - Basic
The following table sets forth the computation of basic net income per share using the
two-class
method:
 
Thirteen weeks ended
   
Twenty-six
 weeks ended
 
 
June 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
 
(in thousands, except per share data)
   
(in thousands, except per share data)
 
Net income
  $
 60,141
    $
 27,856
    $
 78,375
    $
 51,550
 
Allocation of net income for basic:
   
     
     
     
 
Class A Common Stock
  $
 47,930
    $
 20,639
    $
 61,612
    $
 38,161
 
Class B Common Stock
   
11,836
     
6,964
     
16,237
     
12,908
 
Unvested participating shares
   
375
     
253
     
526
     
481
 
                                 
  $
 60,141
    $
 27,856
    $
 78,375
    $
 51,550
 
Weighted average number of shares for basic:
   
     
     
     
 
Class A Common Stock
   
9,720
     
8,648
     
9,572
     
8,627
 
Class B Common Stock*
   
2,400
     
2,918
     
2,523
     
2,918
 
Unvested participating shares
   
76
     
106
     
82
     
109
 
                                 
   
12,196
     
11,672
     
12,177
     
11,654
 
Net income per share for basic:
   
     
     
     
 
Class A Common Stock
  $
4.93
    $
2.39
    $
6.44
    $
4.42
 
Class B Common Stock
  $
4.93
    $
2.39
    $
6.44
    $
4.42
 
                                 
*
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, 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.
Net Income per Common Share - Diluted
The Company calculates diluted net income per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the
two-class
method, which assumes the participating securities are not exercised.
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
 
 
June 27, 2020
   
June 29, 20
19
 
 
Earnings to
Common
Shareholders
 
 
Common Shares
 
 
EPS
 
 
Earnings to
Common
Shareholders
 
 
Common Shares
 
 
EPS
 
 
(in thousands, except per share data)
 
As reported - basic
  $
 47,930
     
9,720
    $
4.93
    $
 20,639
     
8,648
    $
2.39
 
Add: effect of dilutive potential common shares
   
     
     
     
     
     
 
Share-based awards
   
—  
     
138
     
     
—  
     
118
     
 
Class B Common Stock
   
11,836
     
2,400
     
     
6,964
     
2,918
     
 
Net effect of unvested participating shares
   
4
     
—  
     
     
2
     
—  
     
 
                                                 
Net income per common share - diluted
  $
 59,770
     
12,258
    $
4.88
    $
 27,605
     
11,684
    $
2.36
 
                                                 
 
Twenty-six
 weeks ended
 
 
June 27, 2020
   
June 29, 20
19
 
 
Earnings to
Common
Shareholders
 
 
Common Shares
 
 
EPS
 
 
Earnings to
Common
Shareholders
 
 
Common Shares
 
 
EPS
 
 
(in thousands, except per share data)
 
As reported - basic
  $
 61,612
     
9,572
    $
6.44
    $
 38,161
     
8,627
    $
4.42
 
Add: effect of dilutive potential common shares
   
     
     
     
     
     
 
Share-based awards
   
—  
     
126
     
     
—  
     
115
     
 
Class B Common Stock
   
16,237
     
2,523
     
     
12,908
     
2,918
     
 
Net effect of unvested participating shares
   
5
     
—  
     
     
5
     
—  
     
 
                                                 
Net income per common share - diluted
  $
 77,854
     
12,221
    $
6.37
    $
 51,074
     
11,660
    $
4.38
 
                                                 
 
14

Table of Contents
During the thirteen and
twenty-six
weeks ended June 27, 2020, weighted-average stock options to purchase approximately 23,000 and 16,000 shares of Class A Common Stock were outstanding but not included in computing dilutive income per common share because their effects were anti-dilutive. During the thirteen and
twenty-six
weeks ended June 29, 2019, weighted-average stock options to purchase approximately 10,000 and 6,000 shares of Class A Common Stock were outstanding but not included in computing dilutive income per common share because their effects were anti-dilutive. Additionally, performance-based stock options to purchase approximately 18,000
shares of Class A Common Stock were outstanding as of June 29, 2019, respectively, but not included in computing diluted income per common share because the performance criteria of these stock options were not met as of the end of the reporting period.
J.
Comprehensive Income or Loss
Comprehensive income or loss represents net income or loss, plus defined benefit plans liability adjustment, net of tax effect and foreign currency translation adjustment. The defined benefit plans liability and foreign currency translation adjustments for the interim periods ended June 27, 2020 and June 29, 2019 were not material.
K.
Commitments and Contingencies
Contract Obligations
The Company had outstanding total
non-cancelable
contract obligations of $225.1 million at June 27, 2020. These obligations are made up of advertising contracts of $62.6 million, equipment and machinery of $61.5 million, hops, barley and wheat totaling $52.3 million, ingredients of $35.8 million, and other commitments of $12.9 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 June 27, 2020 totaled $31.0 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.
The Company has entered into contracts for barley and wheat with three major suppliers. The contracts include crop year 2019 and 2020 and cover the Company’s barley, wheat, and malt requirements for 2020 and part of 2021. These purchase commitments outstanding at June 27, 2020 totaled $21.3 million.
Currently, the Company brews and packages approximately 60% 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 supplies raw materials to those brewing companies, and incurs conversion fees for labor at the time the liquid is produced and packaged.
During the second quarter of 2020, the Company amended an existing brewing services agreement to include an annual minimum commitment by the Company with a shortfall fee if the minimum is not met. The Company does not currently believe its ordered volumes will fall below the annual
minimum
 
commitments
. The amendment extended the contract through December 31, 2024 and grants the Company the right to extend the agreement beyond the December 31, 2024 termination date on an annual basis through December 31, 2035 at a $1 million annual renewal rate. The amendment required the Company to pay
$8 
million in the second quarter of 2020 for capital improvements at the third
-
party’s brewing facilities. As of June 27, 2020, the Company had prepaid brewing service fees of $6.4 million in prepaid expenses and other current assets and $22.8 million in other assets, long
-
term. The Company plans to expense the total amount of $29.2 million over the contract period ending December 31, 2024.
Subsequent to June 27, 2020, the Company entered into contracts for equipment and machinery of $12.3 million in order to increase production at Company-owned breweries.
The Company is in the process of assessing the impact the
COVID-19
pandemic will have on its future commitments and contingencies but does not believe that the future commitments will be materially impacted.
 
15

Table of Contents
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.
L.
Income
Taxes
As of June 27, 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 June 27, 2020 and December 28, 2019, the Company had $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 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 not currently under any income tax audits as of June 27, 2020. In addition, the Company is generally obligated to report changes in taxable income arising from federal income tax audits.
The following table provides a summary of the income tax provision for the thirteen and
twenty-six
weeks ended June 27, 2020 and June 29, 2019:
 
Thirteen weeks ended
 
 
June 27,
2020
 
 
June 29
,

2019
 
 
(in thousands)
 
Summary of income tax provision
   
     
 
Tax provision based on net income
  $
20,699
    $
10,499
 
Benefit of ASU
2016-09
   
(2,335
)    
(253
)
 
                 
Total income tax provision
  $
18,364
    $
10,246
 
                 
 
Twenty-six
 weeks ended
 
 
June 27,
2020
 
 
June 29
,

2019
 
 
(in thousands)
 
Summary of income tax provision
   
     
 
Tax provision based on net income
  $
25,704
    $
18,408
 
Benefit of ASU
2016-09
   
(4,339
)    
(2,028
)
 
                 
Total income tax provision
  $
21,365
    $
16,380
 
The Company’s effective tax rate for the thirteen weeks ended June 27, 2020, decreased to 23.4% from 26.9% for the thirteen weeks ended June 29, 2019, primarily due to higher tax benefit from stock option activity recorded in accordance with ASU
2016-09.
The Company’s effective tax rate for the
twenty-six
weeks ended June 27, 2020, decreased to 21.4% from 24.1% for the
twenty-six
weeks ended June 29, 2019,
also
primarily due to higher tax benefit from stock option activity recorded in accordance with ASU
2016-09.
M.
Revolving Line of Credit
In March 2018, the Company amended its $150.0 million revolving line of credit
facility
to extend the scheduled expiration date to March 31, 2023. On March 12, 2020, the Company
borrowed
$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 was 1.15% (LIBOR rate of 0.70% plus 0.45%). As of June 27, 2020,
the Company had repaid the entire $100.0 million. As of June 27, 2020, the Company was not in violation of any of its financial covenants to the lender under the credit facility and the entire balance of
$150.0 million on the line of credit was available to the Company for future borrowing.
 
16

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 hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
 
 
 
Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
 
 
Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
 
 
 
Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The Company’s money market funds are measured at fair value on a recurring basis (at least 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 June 27, 2020 and December 28, 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 June 27, 2020 and December 28, 2019, the Company’s cash and cash equivalents balance was $86.7 million and $36.7 million, respectively, including money market funds amounting to $83.0 million and $29.5 million, respectively.
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-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
   
—  
     
—  
     
     
 
Exercised
   
(57,926
)    
120.81
     
     
 
                                 
Outstanding at June 27, 2020
   
281,027
    $
 217.67
     
6.14
    $
 97,280
 
Exercisable at June 27, 2020
   
92,818
    $
 185.56
     
5.11
    $
 35,110
 
Vested and expected to vest at
June 27, 2020
   
256,784
    $
 216.12
     
6.09
    $
 89,287
 
Of the total options outstanding at June 27, 2020,
40,000 shares were performance-based options for which the performance criteria had yet to be achieved.
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. These options have a weighted average fair value of $146.87 per share, of which all shares vested immediately.
 
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Table of Contents
On March 1, 2020, the Company granted 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.
On March 2, 2020, the Company granted 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.
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
   
32.6
Risk-free interest rate
   
1.09
Expected Dividends
   
0.0
Exercise factor
   
2.12 times
 
Discount for post-vesting restrictions
   
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
   
40,316
     
325.12
 
Vested
   
(45,169
)    
213.12
 
Forfeited
   
(3,318
)    
241.05
 
                 
Non-vested
at June 27, 2020
   
113,971
    $
 252.36
 
Of the total shares outstanding at June 27, 2020, 3,000 shares were performance-based shares for which the performance criteria had yet to be achieved.
On March 1, 2020, the Company granted 15,011 shares of restricted stock units to certain officers, senior managers and key employees, 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 vesting conditions. On March 1, 2020, employees elected to purchase 9,127 shares under the Company’s investment share program. 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.
 
18

Table of Contents
Stock-Based Compensation
The following table provides information regarding stock-based compensation expense included in operating expenses in the accompanying consolidated statements of comprehensive income:
 
Thirteen weeks ended
 
 
Twenty-six
 weeks ended
 
 
June 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
 
(in thousands)
 
 
(in thousands)
 
Amounts included in advertising, promotional and selling expenses
 
$
1,147
 
 
$
1,121
 
 
$
1,852
 
 
$
1,598
 
Amounts included in general and administrative expenses
 
 
3,390
 
 
 
2,624
 
 
 
5,251
 
 
 
4,212
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total stock-based compensation expense
 
$
4,537
 
 
$
3,745
 
 
$
7,103
 
 
$
5,810
 
  
 
 
    
 
 
    
 
 
    
 
 
 
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. In the fourth quarter of 2020 the Company expects to complete the termination of the plan and record an expense of approximately $2.3 million as a result of the termination.
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
twenty-six
weeks ended June 27, 2020 was approximately $91,000 and $182,000, respectively. Additionally, the Company incurred expenses of less than $10,000 to various other suppliers affiliated with the Dogfish Head founders.
R.
Subsequent Events
As disclosed in Note K, subsequent to June 27, 2020, the Company entered into contracts for machinery and equipment to increase capacity in Company-owned breweries.
The Company evaluated subsequent events occurring after the balance sheet date, June 27, 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.
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
twenty-six
week periods ended June 27, 2020, as compared to the thirteen and
twenty-six
week periods ended June 29, 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.
 
19

RESULTS OF OPERATIONS
Thirteen Weeks Ended June 27, 2020 compared to Thirteen Weeks Ended June 29, 2019
 
    
Thirteen Weeks Ended
                   
    
(in thousands)
                   
    
June 27,
   
June 29,
   
Amount
         
Per barrel
 
    
2020
   
2019
   
change
   
% change
   
change
 
Barrels sold
       1,921            1,374          547       39.8  
                
% of net
                 
% of net
                   
          
Per barrel
   
revenue
          
Per barrel
    
revenue
                   
Net revenue
   $ 452,138     $ 235.34       100.0   $ 318,407      $ 231.68        100.0   $ 133,731       42.0   $ 3.66  
Cost of goods
     242,514       126.23       53.6     159,405        115.99        50.1     83,109       52.1     10.24  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     209,624       109.11       46.4     159,002        115.69        49.9     50,622       31.8     (6.58
Advertising, promotional and selling expenses
     100,336       52.23       22.2     94,079        68.45        29.5     6,257       6.7     (16.22
General and administrative expenses
     29,685       15.45       6.6     26,748        19.46        8.4     2,937       11.0     (4.01
Impairment of assets
     834       0.43       0.2     243        0.18        0.1     591       0.0     0.25  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     130,855       68.11       28.9     121,070        88.09        38.0     9,785       8.1     (19.98
Operating income
     78,769       41.00       17.4     37,932        27.60        11.9     40,837       107.7     13.40  
Other (expense) income, net
     (264     (0.14     -0.1     170        0.12        0.1     (434     -255.3     (0.26
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Income before income tax expense
     78,505       40.86       17.4     38,102        27.72        12.0     40,403       106.0     13.14  
Income tax expense
     18,364       9.56       4.1     10,246        7.46        3.2     8,118       79.2     2.10  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 60,141     $ 31.30       13.3   $ 27,856      $ 20.27        8.7   $ 32,285       115.9   $ 11.03  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net revenue.
Net revenue increased by $133.7 million, or 42.0%, to $452.1 million for the thirteen weeks ended June 27, 2020, as compared to $318.4 million for the thirteen weeks ended June 29, 2019, primarily as a result of an increase in shipments.
Volume.
Total shipment volume increased by 39.8% to 1,921,000 barrels for the thirteen weeks ended June 27, 2020, as compared to 1,374,000 barrels for the thirteen weeks ended June 29, 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 brand products.
Depletions, or sales by distributors to retailers, of the Company’s products for the thirteen weeks ended June 27, 2020 increased by approximately 46% compared to the thirteen weeks ended June 29, 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 and Angry Orchard brand products.
The Company believes distributor inventory as of June 27, 2020 averaged approximately 2.5 weeks on hand and was lower than prior year levels due to supply chain capacity constraints. The Company expects wholesaler inventory levels in terms of weeks on hand to remain lower than prior year levels for the remainder of the year.
Net revenue per barrel.
Net revenue per barrel increased by 1.6% to $235.34 per barrel for the thirteen weeks ended June 27, 2020, as compared to $231.68 per barrel for the comparable period in 2019, primarily due to price increases and package mix.
Cost of goods sold.
Cost of goods sold was $126.23 per barrel for the thirteen weeks ended June 27, 2020, as compared to $115.99 per barrel for the thirteen weeks ended June 29, 2019. The 2020 increase in cost of goods sold of $10.24 per barrel was primarily the result of higher processing costs due to increased production at third-party breweries, partially offset by cost saving initiatives at the Company-owned breweries.
Gross profit.
Gross profit was $109.11 per barrel for the thirteen weeks ended June 27, 2020, as compared to $115.69 per barrel for the thirteen weeks ended June 29, 2019. The decrease in gross profit per barrel of $6.58 was the result of an increase in cost of goods sold per barrel, partially offset by an increase in net revenue per barrel.
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 $6.3 million, or 6.7%, to $100.4 million for the thirteen weeks ended June 27, 2020, as compared to $94.1 million for the thirteen weeks ended June 29, 2019. The increase was primarily due to increases in salaries and benefits costs, increased brand investments in media and production, the addition of Dogfish Head brand-related expenses beginning July 3, 2019, and increased freight to distributors due to higher volumes partially offset by decreased investments in local marketing and national promotions due to timing of these costs compared to the prior year.
 
20

Table of Contents
Advertising, promotional and selling expenses were 22.2% of net revenue, or $52.23 per barrel, for the thirteen weeks ended June 27, 2020, as compared to 29.5% of net revenue, or $68.45 per barrel, for the thirteen weeks ended June 29, 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.
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 increased by $2.9 million, or 11.0%, to $29.7 million for the thirteen weeks ended June 27, 2020, as compared to $26.7 million for the thirteen weeks ended June 29, 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
one-time
Dogfish Head transaction-related fees of $1.5 million that were incurred in the second quarter of 2019.
Impairment of assets.
Impairment of long-lived assets increased $0.6 million from the second quarter of 2019, primarily due write-downs of equipment at Company-owned breweries.
I
ncome tax expense.
During the thirteen weeks ended June 27, 2020, the Company recorded a net income tax expense of $18.4 million which consists of $20.7 million income tax expenses partially offset by a $2.3 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 June 27, 2020, excluding the impact of ASU
2016-09,
decreased to 26.4% from 27.6% for the thirteen weeks ended June 29, 2019, primarily due to a decrease in
non-deductible
officer compensation.
Twenty-Six
Weeks Ended June 27, 2020 compared to
Twenty-Six
Weeks Ended June 29, 2019
 
    
Twenty-Six
Weeks Ended
                   
    
(in thousands)
                   
    
June 27,
   
June 29,
   
Amount
         
Per barrel
 
    
2020
   
2019
   
change
   
% change
   
change
 
Barrels sold
       3,345            2,451          894       36.5  
                
% of net
                 
% of net
                   
          
Per barrel
   
revenue
          
Per barrel
    
revenue
                   
Net revenue
   $  782,703     $  234.02       100.0   $  570,058      $  232.60        100.0   $  212,645       37.3   $ 1.42  
Cost of goods
     425,106       127.10       54.3     286,516        116.90        50.3     138,590       48.4     10.20  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     357,597       106.92       45.7     283,542        115.69        49.7     74,055       26.1     (8.77
Advertising, promotional and selling expenses
     198,227       59.27       25.3     165,802        67.65        29.1     32,425       19.6     (8.38
General and administrative expenses
     56,714       16.96       7.2     50,122        20.45        8.8     6,592       13.2     (3.49
Impairment of assets
     2,355       0.70       0.3     243        0.10        0.0     2,112       869.1     0.60  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     257,296       76.93       32.9     216,167        88.20        37.9     41,129       19.0     (11.27
Operating income
     100,301       29.99       12.8     67,375        27.49        11.8     32,926       48.9     2.50  
Other (expense) income, net
     (561     (0.17     -0.1     555        0.23        0.1     (1,116     -201.1     (0.40
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Income before income tax expense
     99,740       29.82       12.7     67,930        27.72        11.9     31,810       46.8     2.10  
Income tax expense
     21,365       6.39       2.7     16,380        6.68        2.9     4,985       30.4     (0.29
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 78,375     $ 23.43       10.0   $ 51,550      $ 21.03        9.0   $ 26,825       52.0   $ 2.40  
  
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Net revenue.
Net revenue increased by $212.6 million, or 37.3%, to $782.7 million for the
twenty-six
weeks ended June 27, 2020, as compared to $570.1 million for the
twenty-six
weeks ended June 29, 2019, primarily as a result of an increase in shipments, partially offset by estimated keg returns from distributors and retailers related to
COVID-19
of $5.8 million.
Volume.
Total shipment volume increased by 36.5% to 3,345,000 barrels for the
twenty-six
weeks ended June 27, 2020, as compared to 2,451,000 barrels for the
twenty-six
weeks ended June 29, 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 brand products.
 
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Depletions, or sales by distributors to retailers, of the Company’s products for the
twenty-six
weeks ended June 27, 2020 increased by approximately 43% compared to the
twenty-six
weeks ended June 29, 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 and Angry Orchard brand products.
Net revenue per barrel.
Net revenue per barrel increased by 0.6% to $234.02 per barrel for the
twenty-six
weeks ended June 27, 2020, as compared to $232.60 per barrel for the comparable period in 2019, primarily due to price increases and package mix, partially offset by estimated keg returns from distributors and retailers related to
COVID-19
of $5.8 million.
Cost of goods sold.
Cost of goods sold was $127.10 per barrel for the
twenty-six
weeks ended June 27, 2020, as compared to $116.90 per barrel for the
twenty-six
weeks ended June 29, 2019. The 2020 increase in cost of goods sold of $10.20 per barrel was primarily the result of higher processing costs due to increased production at third-party breweries and higher processing costs and finished goods keg inventory write-offs at Company-owned breweries of which $5.6 million was direct costs related to
COVID-19,
partially offset by cost saving initiatives at Company-owned breweries.
Gross profit.
Gross profit was $106.92 per barrel for the
twenty-six
weeks ended June 27, 2020, as compared to $115.69 per barrel for the
twenty-six
weeks ended June 29, 2019. The decrease in gross profit per barrel of $8.77 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 $32.4 million, or 19.6%, to $198.2 million for the
twenty-six
weeks ended June 27, 2020, as compared to $165.8 million for the
twenty-six
weeks ended June 29, 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 25.3% of net revenue, or $59.27 per barrel, for the
twenty-six
weeks ended June 27, 2020, as compared to 29.1% of net revenue, or $67.65 per barrel, for the
twenty-six
weeks ended June 29, 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 $6.6 million, or 13.2%, to $56.7 million for the
twenty-six
weeks ended June 27, 2020, as compared to $50.1 million for the
twenty-six
weeks ended June 29, 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
one-time
Dogfish Head transaction-related fees of $1.5 million incurred in the second quarter of 2019.
Impairment of assets.
Impairment of long-lived assets increased $2.1 million from the first half of 2019, primarily due write-downs of equipment at Company-owned breweries.
I
ncome tax expense.
During the
twenty-six
weeks ended June 27, 2020, the Company recorded a net income tax expense of $21.4 million which consists of $25.7 million income tax expenses partially offset by a $4.3 million tax benefit related to stock option exercises in accordance with ASU
2016-09.
The Company’s effective tax rate for the
twenty-six
weeks ended June 27, 2020, excluding the impact of ASU
2016-09,
decreased to 25.8% from 27.1% for the
twenty-six
weeks ended June 29, 2019, primarily due to
one-time
state tax benefits related to capital investments.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $86.7 million as of June 27, 2020 from $36.7 million as of December 28, 2019, reflecting cash provided by operating activities, 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.
 
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Cash provided by operating activities for the
twenty-six
weeks ended June 27, 2020 was $104.0 million and primarily consisted of net income of $78.4 million and
non-cash
items of $58.5 million, partially offset by a net increase in operating assets and liabilities of $32.9 million. Cash provided by operating activities for the
twenty-six
weeks ended June 29, 2019 was $55.5 million and primarily consisted of net income of $51.6 million and
non-cash
items of $40.3 million, partially offset by a net increase in operating assets and liabilities of $36.3 million.
The Company used $59.8 million in investing activities during the
twenty-six
weeks ended June 27, 2020, as compared to $203.0 million during the
twenty-six
weeks ended June 29, 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 drive efficiencies and cost reductions, and support product innovation and future growth.
Cash provided by financing activities was $5.8 million during the
twenty-six
weeks ended June 27, 2020, as compared to $42.1 million during the twenty-six weeks ended June 29, 2019. The $36.3 million decrease in cash provided by financing activities in 2020 from 2019 is primarily due to lower net borrowings on the Company’s line of credit within the period.
During the
twenty-six
weeks ended June 27, 2020 and the period from June 28, 2020 through July 17, 2020 the Company did not repurchase any shares of its Class A Common Stock. As of July 17, 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 June 27, 2020 of $86.7 million, along with future operating cash flow and the unused balance of the Company’s line of credit of $150.0 million, will be sufficient to fund future cash requirements. The Company’s $150.0 million credit facility has a term not scheduled to expire until March 31, 2023. As of the date of this filing, the Company was not in violation of any of its covenants to the lender under the credit facility.
2020 Outlook
Year-to-date
depletions through the twenty-eight weeks ended July 11, 2020 are estimated to have increased approximately 42% from the comparable period in 2019. Excluding the Dogfish head impact, depletions increased 37%.
The Company is currently estimating 2020 depletions and shipments growth 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 48%. The Company intends to increase full-year 2020 advertising, promotional and selling expenses by between $70 million and $80 million. 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 currently projects
Non-GAAP
earnings per diluted share, which excludes the impact of ASU
2016-09,
for 2020 of between $11.70 and $12.70, but actual results could vary significantly from this target. The Company estimates a full-year 2020
Non-GAAP
effective tax rate of approximately 26%, which excludes the impact of ASU
2016-09.
Non-GAAP
earnings per diluted share and
Non-GAAP
effective tax rate are not defined terms under U.S. generally accepted accounting principles (“GAAP”). These
Non-GAAP
measures should not be considered in isolation or as 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 continuing to evaluate 2020 capital expenditures. Its current estimates are between $180 million and $200 million, consisting mostly of investments in the Company’s breweries and taprooms. The actual total amount spent on 2020 capital expenditures may well be different from these estimates.
 
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THE POTENTIAL IMPACT OF KNOWN FACTS, COMMITMENTS, EVENTS AND UNCERTAINTIES
Off-balance
Sheet Arrangements
At June 27, 2020, the Company did not have
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K.
Contractual Obligations
There were no material changes outside of the ordinary course of the Company’s business to contractual obligations during the three-month period ended June 27, 2020.
Critical Accounting Policies
There were no material changes to the Company’s critical accounting policies during the three-month period ended June 27, 2020.
FORWARD-LOOKING STATEMENTS
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 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.
CONTROLS AND PROCEDURES
As of June 27, 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
twenty-six
weeks ended June 27, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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Table of Contents
PART II.    OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
During the
twenty-six
weeks ended June 27, 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.
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:
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 have 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 government order or other restriction and in every location or that the third-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-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 half of fiscal 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-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-party breweries;
 
   
disruptions at the Company-owned breweries and third-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;
 
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Table of Contents
   
failure of third parties on which the Company relies, including the Company’s inventory suppliers, third-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;
 
   
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.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of July 17, 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
twenty-six
weeks ended June 27, 2020, the Company did not repurchase any shares of its Class A Common Stock under the previously announced repurchase program.
During the
twenty-six
weeks ended June 27, 2020, the Company repurchased 315 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:
 
          Average              
    Total Number of Shares     Price Paid     Total Number of Shares Purchased as Part of     Approximate Dollar Value of Shares that May Yet be  
Period
  Purchased     per Share     Publicly Announced Plans or Programs     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  
 
 
 
     
 
 
   
Total
    315     $ 135.23       —         90,335  
 
 
 
     
 
 
   
As of July 17, 2020, the Company had 9.9 million shares of Class A Common Stock outstanding and 2.3 million shares of Class B Common Stock outstanding.
 
Item 3.
DEFAULTS UPON SENIOR SECURITIES
Not Applicable
 
Item 4.
MINE SAFETY DISCLOSURES
Not Applicable
 
Item 5.
OTHER INFORMATION
Not Applicable
 
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Table of Contents
Item 6.
EXHIBITS
 
Exhibit
    No.    
 
Title
**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   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   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   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   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).
**10.6   Offer Letter to Carolyn O’Boyle, Chief People Officer, dated February 7, 2020.
  *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   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   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   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   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   XBRL Taxonomy Extension Schema Document
*101.CAL   XBRL Taxonomy Calculation Linkbase Document
*101.LAB   XBRL Taxonomy Label Linkbase Document
*101.PRE   XBRL Taxonomy Presentation Linkbase Document
*101.DEF   XBRL Definition Linkbase Document
*104   The cover page from this Quarterly Report on Form
10-Q
for the quarter ended 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
 
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Table of Contents
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: July 23, 2020
     
/s/ David A. Burwick
      David A. Burwick
      President and Chief Executive Officer
      (principal executive officer)
Date: July 23, 2020
     
/s/ Frank H. Smalla
      Frank H. Smalla
      Chief Financial Officer
      (principal financial officer)
 
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