Quarterly Report (10-q)

SAM

Boston Beer News

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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 September 26, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from

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.

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 October 16, 2020:


Class A Common Stock , $ .01 par value		9,934,625
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

September 26, 2020

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION		PAGE

	Item 1.	Consolidated Financial Statements (Unaudited)	3

		Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019	3

		Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019	4

		Consolidated Statements of Stockholders’ Equity for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019	5

		Consolidated Statements of Cash Flows for the Thirty-nine weeks ended September 26, 2020 and September 28, 2019	6

		Notes to Consolidated Financial Statements	7-19

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-24

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

	Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25-26

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26-27

	Item 3.	Defaults Upon Senior Securities	27

	Item 4.	Mine Safety Disclosures	27

	Item 5.	Other Information	27

	Item 6.	Exhibits	27-29

SIGNATURES

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)


	September 26, 2020			December 28, 2019
Assets
Current Assets:
Cash and cash equivalents	$	157,130		$	36,670
Accounts receivable		93,809			54,404
Inventories		123,831			106,038
Prepaid expenses and other current assets		22,214			12,077
Income tax receivable		3,041			9,459

Total current assets		400,025			218,648

Property, plant and equipment, net		588,977			541,068
Operating right-of-use assets		59,991			53,758
Goodwill		112,529			112,529
Intangible assets		103,994			104,272
Other assets		46,820			23,782

Total assets	$	1,312,336		$	1,054,057


Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	108,600		$	76,374
Accrued expenses and other current liabilities		115,604			99,107
Current operating lease liabilities		7,735			5,168

Total current liabilities		231,939			180,649

Deferred income taxes, net		89,170			75,010
Non-current operating lease liabilities		61,184			53,940
Other liabilities		11,513			8,822

Total liabilities		393,806			318,421

Commitments and Contingencies (See Note K)

Stockholders’ Equity:
Class A Common Stock, $.01 par value; 22,700,000 shares authorized; 9,868,649 and 9,370,526 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively		99			94
Class B Common Stock, $.01 par value; 4,200,000 shares authorized; 2,307,983 and 2,672,983 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively		23			27
Additional paid-in capital		594,427			571,784
Accumulated other comprehensive loss, net of tax		(562	)		(1,669	)
Retained earnings		324,543			165,400

Total stockholders’ equity		918,530			735,636

Total liabilities and stockholders’ equity	$	1,312,336		$	1,054,057

The accompanying notes are an integral part of these consolidated financial statements.

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						Thirty-nine weeks ended
	September 26, 2020			September 28, 2019			September 26, 2020			September 28, 2019
Revenue	$	525,249		$	402,691		$	1,358,563		$	1,008,893
Less excise taxes		32,457			24,225			83,068			60,369

Net revenue		492,792			378,466			1,275,495			948,524
Cost of goods sold		252,207			190,631			677,313			477,147

Gross profit		240,585			187,835			598,182			471,377

Operating expenses:
Advertising, promotional and selling expenses		108,023			96,570			306,250			262,372
General and administrative expenses		30,340			31,429			87,054			81,552
Impairment of assets		441			—			2,796			243

Total operating expenses		138,804			127,999			396,100			344,167

Operating income		101,781			59,836			202,082			127,210

Other income (expense), net:
Interest (expense) income, net		(20	)		(138	)		(169	)		472
Other income (expense), net		190			(764	)		(222	)		(818	)

Total other income (expense), net		170			(902	)		(391	)		(346	)

Income before income tax provision		101,951			58,934			201,691			126,864
Income tax provision		21,183			14,205			42,548			30,585

Net income	$	80,768		$	44,729		$	159,143		$	96,279


Net income per common share - basic	$	6.61		$	3.70		$	13.05		$	8.16

Net income per common share - diluted	$	6.51		$	3.65		$	12.90		$	8.07


Weighted-average number of common shares - Class A basic		9,846			9,136			9,663			8,797

Weighted-average number of common shares - Class B basic		2,308			2,862			2,451			2,899

Weighted-average number of common shares - diluted		12,333			12,150			12,259			11,823


Net income	$	80,768		$	44,729		$	159,143		$	96,279


Other comprehensive income, net of tax:
Foreign currency translation adjustment		61			1			(10	)		43
Defined benefit plans liability adjustment		1,117			—			1,117			—

Total other comprehensive income, net of tax		1,178			1			1,107			43

Comprehensive income	$	81,946		$	44,730		$	160,250		$	96,322

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the thirteen and thirty-nineweeks ended September 26, 2020 and September 28, 2019

(in thousands)

(unaudited)


	Class A Common Shares		Class A Common Stock, Par		Class B Common Shares			Class B Common Stock, Par			Additional Paid-in Capital		Accumulated Other Comprehensive Loss, net of tax			Retained Earnings		Total Stockholders’ Equity
Balance at December 28, 2019		9,371	$	94		2,673		$	27		$	571,784	$	(1,669	)	$	165,400	$	735,636

Net income																	18,234		18,234
Stock options exercised and restricted shares activities		38		—								1,858							1,858
Stock-based compensation expense												2,566							2,566
Conversion from Class B to Class A		150		2		(150	)		(2	)									—
Currency translation adjustment														(58	)				(58	)


Balance at March 28, 2020		9,559	$	96		2,523		$	25		$	576,208	$	(1,727	)	$	183,634	$	758,236


Net income																	60,141		60,141
Stock options exercised and restricted shares activities		61		—								4,582							4,582
Stock-based compensation expense												4,537							4,537
Conversion from Class B to Class A		215		2		(215	)		(2	)									—
Currency translation adjustment														(13	)				(13	)


Balance at June 27, 2020		9,835	$	98		2,308		$	23		$	585,327	$	(1,740	)	$	243,775	$	827,483


Net income																	80,768		80,768
Stock options exercised and restricted shares activities		34		1								5,468							5,469
Stock-based compensation expense												3,632							3,632
Defined benefit plans liability adjustment, net of tax of $378														1,117					1,117
Currency translation adjustment														61					61


Balance at September 26, 2020		9,869	$	99		2,308		$	23		$	594,427	$	(562	)	$	324,543	$	918,530


	Class A Common Shares		Class A Common Stock, Par		Class B Common Shares			Class B Common Stock, Par			Additional Paid-in Capital		Accumulated Other Comprehensive Loss, net of tax			Retained Earnings		Total Stockholders’ Equity
Balance at December 29, 2018		8,580	$	86		2,918		$	29		$	405,711	$	(1,197	)	$	55,688	$	460,317

Net income																	23,694		23,694
Stock options exercised and restricted shares activities		54		—								3,704							3,704
Stock-based compensation expense												2,066							2,066
Currency translation adjustment														37					37


Balance at March 30, 2019		8,634	$	86		2,918		$	29		$	411,481	$	(1,160	)	$	79,382	$	489,818


Net income																	27,856		27,856
Stock options exercised and restricted shares activities		21		1								1,377							1,378
Stock-based compensation expense												3,744							3,744
Currency translation adjustment														5					5


Balance at June 29, 2019		8,655	$	87		2,918		$	29		$	416,602	$	(1,155	)	$	107,238	$	522,801


Net income																	44,729		44,729
Stock options exercised and restricted shares activities		31		—								3,473							3,473
Stock-based compensation expense												3,233							3,233
Shares issued in connection with Dogfish Head merger		430		4								144,739							144,743
Conversion from Class B to Class A		100		1		(100	)		(1	)									—
Currency translation adjustment														1					1


Balance at September 28, 2019		9,216	$	92		2,818		$	28		$	568,047	$	(1,154	)	$	151,967	$	718,980

The accompanying notes are an integral part of these consolidated financial statements.

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Thirty-nine weeks ended
	September 26, 2020			September 28, 2019
Cash flows provided by operating activities:
Net income	$	159,143		$	96,279
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,937			41,841
Impairment of assets		2,796			243
(Gain) loss on disposal of property, plant and equipment		(173	)		449
Change in ROU assets		5,465			2,734
Credit loss expense		746			53
Stock-based compensation expense		10,735			9,043
Deferred income taxes		14,160			14,047
Changes in operating assets and liabilities:
Accounts receivable		(39,775	)		(26,532	)
Inventories		(23,072	)		(16,847	)
Prepaid expenses, income tax receivable and other current assets		(4,043	)		(1,173	)
Other assets		(17,827	)		(12,730	)
Accounts payable		33,020			22,388
Accrued expenses and other current liabilities		18,024			14,949
Change in operating lease liability		(1,887	)		(2,270	)
Other liabilities		2,671			207

Net cash provided by operating activities		208,920			142,681


Cash flows used in investing activities:
Purchases of property, plant and equipment		(100,341	)		(66,760	)
Proceeds from disposal of property, plant and equipment		72			144
Investment in Dogfish Head, net of cash acquired		—			(165,517	)
Other investing activities		392			(10	)

Net cash used in investing activities		(99,877	)		(232,143	)


Cash flows provided by financing activities:
Proceeds from exercise of stock options and sale of investment shares		14,015			8,437
Cash paid on note payable and finance leases		(906	)		(246	)
Cash borrowed on line of credit		100,000			97,000
Cash paid on line of credit		(100,000	)		(97,000	)
Payment of tax withholdings on stock-based payment awards and investment shares		(1,692	)		—

Net cash provided by financing activities		11,417			8,191

Change in cash and cash equivalents		120,460			(81,271	)

Cash and cash equivalents at beginning of year		36,670			108,399


Cash and cash equivalents at end of period	$	157,130		$	27,128


Supplemental disclosure of cash flow information:
Non cash consideration issued in Dogfish Head Brewery Transaction (Refer to Note C)	$	—		$	144,743

Income taxes paid	$	17,309		$	16,759

Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	6,949		$	3,178

Operating cash flows from finance leases	$	106		$	258

Financing cash flows from finance leases	$	838		$	7

Right-of-use assets obtained in exchange for operating lease obligations	$	11,698		$	41,678

Right-of-use assets obtained in exchange for finance lease obligations	$	2,689		$	2,837

Interest paid on revolving credit facility	$	246		$	349

Change in purchase of property, plant and equipment in accounts payable and accrued expenses	$	(3,390	)	$	(2,076	)

The accompanying notes are an integral part of these consolidated financial statements.

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THE BOSTON BEER COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 26, 2020, and the

unaudited

consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the interim periods ended September 26, 2020 and September 28, 2019 have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. All intercompany accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form

10-K

for the year ended December 28, 2019.

In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as of September 26, 2020 and the results of its consolidated operations, stockholders’ equity, and cash flows for the interim periods ended September 26, 2020 and September 28, 2019, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

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. For the thirty-nine weeks ended September 26, 2020, the Company recorded

COVID-19

pre-tax

reductions in net revenue and increases in other costs that total $14.2 million of which $10.0 million was recorded in the first quarter, $4.1 million was recorded in the second quarter and $0.1 million was recorded in the third quarter. The total amount consists of a $3.4 million reduction in net revenue for estimated keg returns from distributors and retailers and $10.8 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 $7.4 million are recorded in cost of goods sold and $3.4 million are recorded in operating expenses. In addition to these direct financial impacts,

COVID-19

related safety measures resulted in a reduction of brewery productivity. This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins. While the duration of the disruption and related impact on the Company’s consolidated financial statements is currently uncertain, the Company expects to continue to incur increased costs related to health and safety 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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The Company’s allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Transaction is based on estimated fair values as of July 3, 2019, and was finalized on July 3, 2020. The following table summarizes the acquisition date fair value of the tangible assets, intangible assets, liabilities assumed, and related goodwill acquired from Dogfish Head, as well as the allocation of purchase price paid:


	Total (In Thousands)
Cash and cash equivalents	$	7,476
Accounts receivable		8,081
Inventories		9,286
Prepaid expenses and other current assets		847
Property, plant and equipment		106,964
Goodwill		108,846
Brand		98,500
Other intangible assets		3,800
Other assets		378

Total assets acquired		344,178
Accounts payable		3,861
Accrued expenses and other current liabilities		4,085
Deferred income taxes		18,437
Other liabilities		59

Total liabilities assumed		26,442

Net assets acquired	$	317,736

Cash consideration	$	172,993
Nominal value of equity issued		162,999
Fair Value reduction due to liquidity		(18,256	)

Estimated total purchase price	$	317,736

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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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)

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.

(ii)

The tax effects of the pro forma adjustments at an estimated statutory rate of 25.6%.


	Thirteen weeks ended		Thirty-nine weeks ended
	September 28, 2019		September 28, 2019
	(in thousands)		(in thousands)
Net revenue	$	379,205	$	1,002,959
Net income	$	46,445	$	103,105
Basic earnings per share	$	3.84	$	8.74
Diluted earnings per share	$	3.79	$	8.64

D. Goodwill and Intangible Assets

The Company’s intangible assets as of September 26, 2020 and December 28, 2019 were as follows:


			As of September 26, 2020								As of December 28, 2019
	Estimated Useful Life (Years)		Gross Carrying Value		Accumulated Amortization			Net Book Value			Gross Carrying Value		Accumulated Amortization			Net Book Value
									(in thousands	)
Custmer Relationships		15	$	3,800	$	(316	)	$	3,484		$	3,800	$	(127	)	$	3,673
Trade Names		Indefinite		100,510		—			100,510			100,599		—			100,599

Total intangible assets			$	104,310	$	(316	)	$	103,994		$	104,399	$	(127	)	$	104,272

As disclosed within Note C, the Company acquired intangible assets as part of the Dogfish Head transaction that

consist

of $98.5 million for the value of the Dogfish Head brand name and $3.8 million for the value of customer relationships. The customer relationship intangible will be amortized on a straight-line basis over the 15 year useful life. Amortization expense in the thirteen and thirty-nine weeks ended September 26, 2020 was approximately $63,000 and $190,000, respectively. The Company expects to record amortization expense as follows over the remaining current year and the five subsequent years:


Fiscal Year	Amount (in thousands)
Remainder of 2020	$	63
2021		253
2022		253
2023		253
2024		253
2025		253

E. Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

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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 adopted the standard in the third quarter of 2020 during the annual goodwill impairment assessment and there was no material impact.

Accounting Pronouncements Not Yet Effective

In December 2019, the FASB issued ASU

2019-12,

Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard includes multiple key provisions, including removal of certain exceptions to ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. ASU

2019-12

is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

F. Revenue Recognition

During the thirty-nine weeks ended September 26, 2020 and September 28, 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 September 26, 2020 and December 28, 2019, the Company has deferred $11.5 million and $7.0 million, respectively in revenue related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

Customer promotional discount programs are entered into by the Company with distributors for certain periods of time. The reimbursements for discounts to distributors are recorded as reductions to net revenue and were $19.0 million and $47.6 million for the thirteen and thirty-nine weeks ended September 26, 2020, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue and were $14.8 million and $34.5 million for the thirteen and thirty-nine weeks ended September 28, 2019, respectively. The agreed-upon discount rates are applied to certain distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.

Customer programs and incentives are a common practice in the alcohol beverage industry. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses

based on the nature of the expenditure. Customer incentives and other payments made to distributors are primarily based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities

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promoting the Company’s products may include, but are not limited to

point-of-sale

and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs for the thirteen and thirty-nine weeks ended September 26, 2020 were $7.5 million and $16.9 million, respectively. For the thirteen and thirty-nine weeks ended September 26, 2020, the Company recorded certain of these costs in the total amount of $6.9 million and $15.9 million, respectively as reductions to net revenue. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended September 28, 2019 were $7.8 million and $17.8 million, respectively. Amounts paid to customers in connection with these programs that were recorded as reductions to revenue for the thirteen and thirty-nine weeks ended September 2

, 2019 were $6.2 million and $13.0 million, respectively. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at the period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

The Further 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 $4.0 million and $2.8 million for the thirteen weeks ended September 26, 2020 and September 28, 2019, respectively. The Company benefited from a reduction in federal excise taxes of $9.8 million and $6.6 million for the thirty-nine weeks ended September 26, 2020 and September 28, 2019 respectively.

On March 31, 2020, The Alcohol and Tobacco Tax and Trade Bureaus (“TTB”) released TTB Industry Circular

2020-2,

which postponed all Federal excise tax payments for ninety days on sales of wine, beer and distilled spirits between March 1, 2020 and July 1, 2020. As a September 26, 2020, the Company had accrued federal excise taxes of $8.6 million in accrued expenses and other current liabilities,

which will be fully paid during the fourth quarter of 2020.

The Company believes distributor inventory as of September 26, 2020 averaged approximately 2 weeks on hand and was lower than prior year levels due to depletions outpacing supply constrained shipments. The Company expects wholesaler inventory levels in terms of weeks on hand to remain between 1 and 4 weeks 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:


	September 26,		December 28,
	2020		2019
	(in thousands)
Current inventory:
Raw materials	$	61,705	$	61,522
Work in process		14,287		12,631
Finished goods		47,839		31,885

Total current inventory		123,831		106,038
Long term inventory		15,327		10,048

Total inventory	$	139,158	$	116,086

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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 September 26, 2020, and December 28, 2019 total ROU assets and lease liabilities were as follows:


	Classification	Leases
		September 26, 2020		December 28, 2019

		(in thousands)
Right-of-use assets
Operating lease assets	Operating right-of-use assets	$	59,991	$	53,758
Finance lease assets	Property, plant and equipment, net		4,389		2,531

Lease Liabilities
Current
Operating lease liabilities	Current operating lease liabilities		7,735		5,168
Finance lease liabilities	Accrued expenses and other current liabilities		1,441		546
Non-current
Operating lease liabilities	Non-current operating lease liabilities		61,184		53,940
Finance lease liabilities	Other liabilities		2,997		2,042

The gross value and accumulated depreciation of ROU assets related to finance leases as of September 26, 2020 and December 28, 2019 were as follows:


	Finance Leases
	September 26,			December 28,
	2020			2019
	(in thousands)
Gross value	$	5,525		$	2,837
Accumulated amortization		(1,136	)		(306	)

Carrying value	$	4,389		$	2,531

Components of lease cost for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019 were as follows:


	Lease Cost
	Thirteen weeks ended				Thirty-nine weeks ended
	September 26,		September 28,		September 26,		September 28,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Operating lease cost	$	2,425	$	1,375	$	7,277	$	3,680
Variable lease costs not included in liability		349		171		1,321		643
Finance lease cost:
Amortization of right-of-use asset		257		131		830		174
Interest on lease liabilities		31		206		106		258

Total finance lease cost	$	288	$	337	$	936	$	432

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Maturities of lease liabilities as of September 26, 2020 were as follows:


	Operating Leases			Finance Leases			Weighted-Average Remaining Term in Years
	Operating Leases			Finance Leases			Operating Leases		Finance Leases
	(in thousands)
2020	$	2,464		$	391
2021		10,094			1,572
2022		9,908			1,572
2023		9,737			863
2024		9,470			265
Thereafter		39,523			22

Total lease payments		81,196			4,685
Less imputed interest (based on 3.5% weighted - average discount rate)		(12,277	)		(247	)

Present value of lease liability	$	68,919		$	4,438			9.0		3.1

I. Net Income per Share

The Company calculates net income per share using the

two-class

method, which requires the Company to allocate net income to its Class A Common Shares, Class B Common Shares and unvested share-based payment awards that participate in dividends with common stock, in the calculation of net income per share.

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

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

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.

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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				Thirty-nine weeks ended
	September 26,		September 28,		September 26,		September 28,
	2020		2019		2020		2019
	(in thousands, except per share data)				(in thousands, except per share data)
Net income	$	80,768	$	44,729	$	159,143	$	96,279

Allocation of net income for basic:
Class A Common Stock	$	65,074	$	33,776	$	126,146	$	71,761
Class B Common Stock		15,254		10,581		31,996		23,652
Unvested participating shares		440		372		1,001		866

	$	80,768	$	44,729	$	159,143	$	96,279
Weighted average number of shares for basic:
Class A Common Stock		9,846		9,136		9,663		8,797
Class B Common Stock*		2,308		2,862		2,451		2,899
Unvested participating shares		67		101		77		106

		12,221		12,099		12,191		11,802
Net income per share for basic:
Class A Common Stock	$	6.61	$	3.70	$	13.05	$	8.16

Class B Common Stock	$	6.61	$	3.70	$	13.05	$	8.16

*Change in Class B Common Stock resulted from the conversion of 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
	September 26, 2020						September 28, 2019
	Earnings to Common Shareholders		Common Shares		EPS		Earnings to Common Shareholders		Common Shares		EPS
						(in thousands, except per share data)
As reported—basic	$	65,074		9,846	$	6.61	$	33,776		9,136	$	3.70
Add: effect of dilutive potential common shares
Share-based awards		—		179				—		152
Class B Common Stock		15,254		2,308				10,581		2,862
Net effect of unvested participating shares		6		—				4		—

Net income per common share—diluted	$	80,334		12,333	$	6.51	$	44,361		12,150	$	3.65


	Thirty-nine weeks ended
	September 26, 2020						September 28, 2019
	Earnings to Common Shareholders		Common Shares		EPS		Earnings to Common Shareholders		Common Shares		EPS
					(in thousands, except per share data)
As reported—basic	$	126,146		9,663	$	13.05	$	71,761		8,797	$	8.16
Add: effect of dilutive potential common shares
Share-based awards		—		145				—		127
Class B Common Stock		31,996		2,451				23,652		2,899
Net effect of unvested participating shares		12		—				8		—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company