BOSTON BEER CO INC (SAM)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has elected to omit discussion of the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in the Company's Form 10-K for the fiscal year ended December 30, 2023, filed on February 27, 2024, for reference to discussion of the fiscal year ended December 31, 2022, the earliest of the three fiscal years presented.

Forward-Looking Statements

In this Form 10-K and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-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 above and the other information set forth in this Form 10-K.

Introduction

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

The Company competes primarily in the combined Beyond beer and Traditional beer market ("US Beer Market"). Beyond beer includes flavored malt beverages, hard seltzer, hard cider, spirits based ready to drink beverages (“spirits RTDs”) and other emerging beverages. Traditional beer generally includes mass domestics, imports, domestic specialties and craft beer.

Results of Operations

Year Ended December 28, 2024 (52 weeks) Compared to Year Ended December 30, 2023 (52 weeks)

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Net revenue. Net revenue increased by $4.3 million, or 0.2%, to $2,012.9 million for the year ended December 28, 2024, as compared to $2,008.6 million for the year ended December 30, 2023, due to price increases of $38.3 million and lower returns of $13.0 million, partially offset by the impact of lower shipment volume of $48.3 million.

Volume. Total shipment volume of 7,493,000 barrels for the year ended December 28, 2024 decreased by 2.4% over 2023 levels of 7,678,000 barrels, primarily due to decreases in the Company’s Truly brands, partially offset by increases in its Twisted Tea and Sun Cruiser brands.

Depletions of the Company’s products for the year ended December 28, 2024 decreased by approximately 2% compared to the prior year.

The Company believes distributor inventory as of December 28, 2024 averaged approximately four weeks on hand and was at an appropriate level for each of its brands.

Net Revenue per barrel. The net revenue per barrel increased by 2.7% to $268.64 per barrel for the year ended December 28, 2024, as compared to $261.61 per barrel for the year ended December 30, 2023, primarily due to price increases and lower returns.

Cost of goods sold. Cost of goods sold was $149.36 per barrel for the fifty-two weeks ended December 28, 2024, as compared to $150.59 per barrel for the fifty-two weeks ended December 30, 2023. The 2024 decrease in cost of goods sold of $1.23, or 3.2% per barrel was primarily due to contract renegotiations and recipe optimization savings of $24.1 million, or $3.22 per barrel, partially offset by inflationary impacts of $18.6 million, or $2.48 per barrel.

Inflationary impacts of $18.6 million consist primarily of increased material costs of $10.2 million and internal brewery costs of $8.4 million.

Gross profit. Gross profit was $119.27 per barrel for the year ended December 28, 2024, as compared to $111.01 per barrel for the year ended December 30, 2023. Gross margin was 44.4% for the year ended December 28, 2024, as compared to 42.4% for the year ended December 30, 2023. Gross margin primarily benefited from price increases, contract renegotiations and recipe optimization savings and lower returns, partially offset by higher brewery processing costs per barrel due to lower volumes and increased inflationary costs.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to other entities that classify costs related to distribution differently.

Advertising, promotional, and selling expenses. Advertising, promotional and selling expenses, decreased $4.0 million, or 0.7%, to $552.0 million for the year ended December 28, 2024, as compared to $556.0 million for the year ended December 30, 2023. The decrease was primarily due to decreased freight to distributors of $10.5 million from lower rates and volumes. Brand and selling costs increased $6.5 million, primarily due to increased brand media investments and higher salaries and benefits.

Advertising, promotional and selling expenses were 27.4% of net revenue, or $73.67 per barrel, for the year ended December 28, 2024, as compared to 27.7% of net revenue, or $72.41 per barrel, for the year ended December 30, 2023. The Company will invest in advertising and promotional campaigns that it believes are effective, but there is no guarantee that such investment will generate sales growth.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to approximately 2% of net sales. The Company may adjust its promotional efforts in the Distributors’ markets, if changes occur in these promotional contribution arrangements, depending on the industry and market conditions.

General and administrative expenses. General and administrative expenses increased by $15.4 million, or 8.8%, to $189.9 million for the year ended December 28, 2024, as compared to $174.5 million for the comparable period in 2023. The increase was primarily due to higher salaries and benefits costs resulting from Chief Executive Officer transition costs recorded in the first quarter as well as increased inflationary costs.

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Impairment of intangible assets. Impairment of intangible assets reflects a $42.6 million non-cash impairment charge recorded for the Dogfish Head brand, taken as a result of the Company’s annual impairment analysis as of September 1, 2024. The impairment determination was primarily based on the latest forecasts of brand performance which have been below the Company’s previous projections. In fiscal 2023, the Company recorded an impairment charge of $16.4 million primarily for the Dogfish Head brand. See further discussion in Note H to the Consolidated Financial Statements within Part II, Item 8 of this Form 10-K.

Impairment of brewery assets. Impairment of brewery assets of $7.2 million increased by $1.8 million from the prior fiscal year, due to higher write-offs of equipment at Company-owned breweries.

Contract settlement costs. Contract settlement costs of $26 million due to an amendment and restatement in its entirety of an existing production agreement with a third-party supplier, Rauch. This amendment adjusts the existing production agreement to better match the Company’s future capacity requirements and results in increased production flexibility and more favorable termination rights to the Company.

Income tax provision. The Company’s effective tax rate for fiscal 2024 was 31.9% compared to 30.2% in fiscal 2023, primarily due to lower pre-tax income with no corresponding reduction in non-deductible expenses. The Company estimates the lower pre-tax income resulting from the impairment of intangible assets and the contract settlement negatively impacted the 2024 effective tax rate by approximately 300 basis points.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its existing cash balances, cash flows from operating activities and amounts available under its revolving credit facility. The Company’s material cash requirements include working capital needs, satisfaction of contractual commitments, and investment in the Company’s business through capital expenditures.

Cash and cash equivalents decreased to $211.8 million as of December 28, 2024 from $298.5 million as of December 30, 2023, primarily reflecting repurchases of the Company's Class A common stock, a note receivable issued, and purchases of property, plant, and equipment, partially offset by net cash provided by operating activities.

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

Cash provided by operating activities for the year ended December 28, 2024 was $248.9 million and consisted of net income of $59.7 million, non-cash items of $150.3 million, and an inflow of $38.9 million from a net decrease in operating assets and liabilities. The third-party production prepayments decrease of $19.1 million is due to a full year amortization of these prepayments during 2024, decreasing the prepaid balance from $33.6 million as of December 30, 2023 to $14.5 million as of December 28, 2024. The accrued expenses and other current liabilities increase of $12.3 million is primarily due to increases in accrued supply chain costs and accrued marketing costs compared to the prior year. The inventory decrease of $6.9 million is primarily due decrease on hops inventory compared to the prior year to align with beer volumes.

Cash provided by operating activities for the year ended December 30, 2023 was $265.2 million and consisted of net income of $76.3 million, non-cash items of $124.0 million, and an inflow of $64.9 million from a net decrease in operating assets and liabilities. The inventory decrease of $31.5 million is due to improvements in supply chain process resulting in lower inventory levels and lower volumes. The third-party production prepayments decrease of $27.8 million is due to expensing of these prepayments over the respective contract terms. The accrued expenses and other current liabilities increase of $13.9 million is primarily due to increases in accrued incentive compensation compared to the prior year. The accounts receivable increase of $10.3 million is primarily due to timing of shipments in the month of December compared to the prior year.

The Company used $96.3 million in investing activities during the year ended December 28, 2024, as compared to $62.4 million during the year ended December 30, 2023. The increase in investing activity cash outflows is due to a $20.0 million note receivable issued and a $12.2 million increase in capital investments. For both periods, capital investments were made mostly in the Company’s breweries to drive efficiencies and cost reductions and support product innovation and future growth.

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Cash used in financing activities was $239.3 million during the year ended December 28, 2024, as compared to $84.8 million during the year ended December 30, 2023. The $154.5 million increase in financing activity cash outflows in 2024 compared to 2023 is primarily due to higher repurchases of the Company's Class A common stock in the current year.

During fiscal year 2024, the Company repurchased and subsequently retired 803,281 shares of its Class A Common Stock for an aggregate purchase price of $238.9 million. As of December 28, 2024, the Company had repurchased a cumulative total of approximately 14.9 million shares of its Class A Common Stock for an aggregate purchase price of approximately $1.17 billion and had approximately $427.5 million remaining on the $1.6 billion stock repurchase expenditure limit set by the Board of Directors.

The Company expects that its cash balance as of December 28, 2024 of $211.8 million and future operating cash flows, along with its $150.0 million credit facility agreement, will be sufficient to fund future cash requirements. Refer to Note K of the Notes to the Consolidated Financial Statements within Part II, Item 8 of this Form 10-K for further details of the terms of the credit facility agreement. 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.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

Provision for Excess or Expired Inventory

The provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various raw material ingredients and finished goods. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provision for excess or expired inventory included in cost of goods sold was $21.9 million, $19.3 million, and $35.9 million in fiscal years 2024, 2023, and 2022 respectively.

Valuation of Property, Plant, and Equipment

The carrying value of property, plant, and equipment, net of accumulated depreciation, at December 28, 2024 was $616.2 million. For purposes of determining whether there are any impairment losses on brewery assets, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. If an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of potential impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, the remaining useful life of the asset, and the usefulness of the asset in consideration of future business plans. Impairment of brewery assets classified as property, plant, and equipment included in operating expenses was $7.2 million, $5.0 million and $2.6 million in fiscal years 2024, 2023, and 2022, respectively.

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

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Valuation of Goodwill and Indefinite Lived Intangible Assets

The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.

The Company’s annual goodwill impairment evaluation analysis conducted at the end of fiscal August indicated that the fair value of the Company’s goodwill was substantially greater than the carrying value and accordingly there was no impairment to record during fiscal 2024. The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit, of which the Company has one, is less than its carrying amount or to proceed directly to performing a quantitative impairment test. Under the quantitative assessment, the estimated fair value of the Company’s reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the Company’s reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the Company’s market capitalization and enterprise value. If the estimated fair value of the Company’s reporting unit is less than the carrying value of its reporting unit, a goodwill impairment will be recognized. In estimating the fair value of the Company’s reporting unit, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, cost of capital, and other factors. The assumptions used in the estimate of fair value are based on historical trends and the projections and assumptions that are used in the latest operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for the Company’s goodwill which could have a material adverse impact on the Company’s financial statements.

The Company’s intangible assets consist primarily of a trademark and customer relationships obtained through the Company’s Dogfish Head acquisition. Customer relationships are amortized over their estimated useful lives. As of the annual impairment assessment date at the end of fiscal August, the Dogfish Head trademark was determined to have a indefinite useful life and was not amortized. The guidance for indefinite lived intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. Under the quantitative assessment, the trademark is evaluated for impairment by comparing the carrying value of the trademark to its estimated fair value. The estimated fair value of the trademark is calculated based on an income approach using the relief from royalty method. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value.

Significant judgment is required to estimate the fair value of the Dogfish Head trademark. Accordingly, the Company obtains the assistance of third-party valuation specialists as part of the impairment evaluation. In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, the discount rate, and the after-tax royalty savings expected from ownership of the trademark. The assumptions and projections used in the estimate of fair value are consistent with recent trends and represent the projections used in Company’s current strategic operating plans which include reductions in revenues from the Dogfish Head beer products. These assumptions reflect management’s estimates of future economic and competitive conditions and consider many factors including macroeconomic conditions, industry growth rates, and competitive activities and are, therefore, subject to change as a result of changing market conditions. Beginning in the fourth quarter of 2024, the Company changed the indefinite useful life of the Dogfish Head trademark asset and began amortizing the remaining $14.4 million balance over an estimated useful life of 10 years.

The Company performed a sensitivity analysis on its significant assumptions used in the Dogfish Head trademark fair value calculation as of September 28, 2024 and determined the following:

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A decrease in the annual forecasted revenue growth rate of 1.0% would result in a 4.9% decrease to the fair value of $14.4 million as of September 28, 2024.

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A decrease in the discount rate of 1.5% would result in a 8.3% increase to the fair value of $14.4 million as of September 28, 2024, and an increase in the discount rate of 1.5% would result in a 6.9% decrease to the fair value of $14.4 million as of September 28, 2024.

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Revenue Recognition and Classification of Customer Programs and Incentives

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 December 28, 2024 and December 30, 2023, the Company had deferred revenue of $11.3 million and $8.9 million, respectively, related to product shipped prior to these dates for which the criteria to recognize revenue was not met as of these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of its products in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys or offers credits for stale beer that is returned or destroyed by Distributors. The Company generally credits approximately fifty percent of the distributor’s cost of beer that has passed its freshness expiration date when it is returned to the Company or destroyed. The Company reduces revenue and establishes an accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue. Historically, the cost of actual stale beer returns has been in line with established reserves; however, the cost could differ materially from the reserves which would impact revenue. As of December 28, 2024, and December 30, 2023, the stale beer reserve was $6.1 million and $8.2 million, respectively. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

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 the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to, point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $112.3 million, $106.4 million and $95.9 million in fiscal years 2024, 2023, and 2022, respectively. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2024, 2023, and 2022 were $61.0 million, $62.6 million and $54.8 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. The agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company; however, the amounts could differ from the estimated allowances.

Customer incentives and other payments are made primarily to Distributors based upon the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to, point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2024, 2023, and 2022 were $51.3 million, $43.8 million and $41.1 million, respectively. In fiscal years 2024, 2023, and 2022, the Company recorded certain of these costs in the total amount of $32.2 million, $31.4 million and $29.9 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.

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

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Stock-Based Compensation

The Company accounts for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures. Stock-based compensation was $19.0 million, $17.0 million and $14.0 million in fiscal years 2024, 2023, and 2022, respectively.

As permitted by ASC 718, the Company elected to use a lattice model, such as the trinomial option-pricing model, to estimate the fair values of stock options. All option-pricing models require the input of subjective assumptions. These assumptions include the estimated volatility of the Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and expected exercise behavior. See Note O for further discussion of the application of the option-pricing models.

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

Business Environment

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

The Beyond beer and Traditional beer categories within the United States are highly competitive due to large domestic and international brewers and the large number of craft brewers in this category who distribute similar products that have similar pricing and target drinkers. The Company believes that its pricing is appropriate given the quality and reputation of its brands, while realizing that economic pricing pressures may affect future pricing levels. Large domestic and international brewers are able to compete more aggressively than the Company, as they have substantially greater resources, marketing strength and distribution networks than the Company. The Company also increasingly competes with wine and spirits companies, some of which have significantly greater resources than the Company. This competitive environment may affect the Company’s overall performance within the Beyond beer and Traditional beer categories. As the market continues to consolidate, the Company believes that companies that are well-positioned in terms of brand equity, marketing and distribution will have greater success than those who do not. With its over 300 Distributors nationwide and the Company’s sales force of over 475 people, as well as a commitment to maintaining its innovation capability, brand equity and quality, the Company believes it is well positioned to compete in the Beyond beer and Traditional beer categories.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has elected to omit discussion of the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in the Company's Form 10-K for the fiscal year ended December 31, 2022, filed on February 22, 2023, for reference to discussion of the fiscal year ended December 25, 2021, the earliest of the three fiscal years presented.

Forward-Looking Statements

In this Form 10-K and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-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 above and the other information set forth in this Form 10-K.

Introduction

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

Most of the Company’s beverages which include flavored malt beverages, hard seltzers, beers, and hard ciders, are primarily positioned in the market for High End beer occasions. High End beers and beer occasions (the “High End category”) are determined by higher price, quality, image and taste, as compared with regular domestic beers. Boston Beer is one of the largest suppliers in the High End category in the United States. The High End category has seen high single-digit compounded annual growth over the past ten years. The Company believes that the High End category is positioned to increase market share in the total beer category, as drinkers continue to trade up in taste and quality. The Company estimates that the High End full year percentage volume changes in 2021, 2022 and 2023 were approximately 2%, (3%) and 1% respectively. These trends are above the estimated United States beer market volume changes in 2021, 2022 and 2023, of (5%), (5%) and (2%) respectively.

The market for hard seltzer products has experienced declining annual volume growth rate trends from estimated growth of 158% in 2020 and 13% in 2021 to an estimated decline of 15% in 2022 and 21% in 2023. The decline in volume trends has negatively impacted the Company's volume of depletions, or Distributor sales to retailers, and shipments, as well as its projections for the future. The decline in volume trends resulted in several supply chain related costs recorded during the second half of 2021 and 2022. These costs included provisions for excess and obsolete inventories, property, plant, and equipment impairments, write-offs of third-party production prepayments, and provisions for costs associated with the termination of various third-party production contracts.

Depletions of the Company’s beverages for the 52 week fiscal period ended December 30, 2023, decreased approximately 6% from the 53 week fiscal period in the prior year.

Depletions of the Company’s beverages for the 53 week fiscal period ended December 31, 2022, decreased approximately 5% from the comparable 52 week fiscal period in the prior year.

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Results of Operations

Year Ended December 30, 2023 (52 weeks) Compared to Year Ended December 31, 2022 (53 weeks)

Net revenue. Net revenue decreased by $81.7 million, or 3.9%, to $2,008.6 million for the year ended December 30, 2023, as compared to $2,090.3 million for the year ended December 31, 2022, primarily as a result of lower shipment volume of $129.3 million and $12.6 million of product mix impacts, partially offset by price increases of $60.2 million.

Volume. Total shipment volume of 7,678,000 barrels for the year ended December 30, 2023 decreased by 6.2% over 2022 levels of 8,183,000 barrels, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Samuel Adams, Dogfish Head and Hard Mountain Dew brands, partially offset by increases in its Twisted Tea brand. On a 52-week comparable basis, shipment volume decreased 5.2%.

Depletions of the Company’s products for the year ended December 30, 2023 decreased by approximately 6% compared to the prior year, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Samuel Adams and Dogfish Head brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands. On a 52-week comparable basis, depletions decreased 5%.

The Company believes distributor inventory as of December 30, 2023 averaged approximately four weeks on hand and was at an appropriate level for each of its brands.

Net Revenue per barrel. The net revenue per barrel increased by 2.4% to $261.61 per barrel for the year ended December 30, 2023, as compared to $255.44 per barrel for the year ended December 31, 2022, primarily due to price increases, partially offset by product mix impacts.

Cost of goods sold. Cost of goods sold was $150.59 per barrel for the fifty-two weeks ended December 30, 2023, as compared to $150.10 per barrel for the fifty-three weeks ended December 31, 2022. The 2023 increase in cost of goods sold of $0.49, or 0.3% per barrel was primarily due to inflationary cost impacts of $30.0 million, or $3.91 per barrel, increased third-party production shortfall fees of $6.5 million, or $0.85 per barrel, the brewery cost absorption impact due to lower volume of $6.2 million, or $0.80 per barrel, and a contract settlement cost of $4.5 million, or $0.59 per barrel partially offset by contract renegotiations and recipe optimization of $26.6 million, or $3.46 per barrel, and decreases in inventory obsolescence of $14.8 million, or $1.93 per barrel.

Inflationary impacts of $30.0 million consist primarily of increased material costs of $16.0 million, costs of third-party production of $7.6 million, and internal brewery costs of $6.4 million.

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Supply chain constraints in package materials, primarily cans, have impacted production schedules and increased can costs, as a result of using a more expensive supplier. During fiscal 2023 and 2022, the additional can costs related to use of this more expensive supplier were zero and $3.6 million, respectively. These supply chain constraints in package materials did not otherwise have a material impact on the Company’s results of operations or capital resources.

Gross profit. Gross profit was $111.01 per barrel for the year ended December 30, 2023, as compared to $105.33 per barrel for the year ended December 31, 2022. Gross margin was 42.4% for the year ended December 30, 2023, as compared to 41.2% for the year ended December 31, 2022. The increase was primarily due price increases, contract renegotiations and recipe optimization and lower inventory obsolescence partially offset by inflationary costs, increased third-party production shortfall fees and brewery cost absorption impact due to lower volume.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to other entities that classify costs related to distribution differently.

Advertising, promotional, and selling expenses. Advertising, promotional and selling expenses, decreased $22.4 million, or 3.9%, to $556.0 million for the year ended December 30, 2023, as compared to $578.4 million for the year ended December 31, 2022. The decrease was primarily due to decreased freight to distributors of $50.9 million from lower rates and volumes, partially offset by an increase in brand investments of $28.5 million, mainly driven by higher investments in local marketing and media of $15.9 million and increased salaries and benefits costs of $14.0 million.

Advertising, promotional and selling expenses were 27.7% of net revenue, or $72.41 per barrel, for the year ended December 30, 2023, as compared to 27.7% of net revenue, or $70.68 per barrel, for the year ended December 31, 2022. The Company will invest in advertising and promotional campaigns that it believes are effective, but there is no guarantee that such investment will generate sales growth.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to approximately 2% of net sales. The Company may adjust its promotional efforts in the Distributors’ markets, if changes occur in these promotional contribution arrangements, depending on the industry and market conditions.

General and administrative expenses. General and administrative expenses increased by $17.0 million, or 10.8%, to $174.5 million for the year ended December 30, 2023, as compared to $157.5 million for the comparable period in 2022. The increase was primarily due to increased consulting costs of $7.5 million and increased salaries and benefits costs of $4.9 million, mainly due to higher incentive compensation.

Impairment of intangible assets. Impairment of intangible assets reflects a $16.4 million non-cash impairment charge recorded primarily for the Dogfish Head brand, taken as a result of the Company’s annual impairment analysis as of September 1, 2023. The impairment determination was primarily based on the latest forecasts of brand performance which have been below the Company’s previous projections. In fiscal 2022, the Company recorded an impairment charge of $27.1 million for the Dogfish Head brand. See further discussion in Note H to the Consolidated Financial Statements within Part II, Item 8 of this Form 10-K.

Impairment of brewery assets. Impairment of brewery assets of $5.4 million increased by $2.6 million from the prior fiscal year, due to higher write-offs of equipment at Company-owned breweries.

Contract termination costs and other. Contract termination costs decreased by $5.4 million primarily due to costs incurred during fiscal year 2022 resulting from negotiations with a supplier that terminated a production agreement.

Income tax provision. The Company’s effective tax rate for fiscal 2023 was a tax provision of 30.2% compared to 26.4% in fiscal 2022, primarily due to an increase in non-deductible officer compensation.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its existing cash balances, cash flows from operating activities and amounts available under its revolving credit facility. The Company’s material cash requirements include working capital needs, satisfaction of contractual commitments, and investment in the Company’s business through capital expenditures.

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Cash and cash equivalents and restricted cash increased to $298.5 million as of December 30, 2023 from $180.6 million as of December 31, 2022, primarily reflecting cash provided by operating activities and proceeds from the exercise of stock options and sale of investment shares, partially offset by repurchases of Class A common stock and 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, impairment of intangible assets, stock-based compensation expense, other non-cash items included in operating results, and changes in operating assets and liabilities, such as accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, and accrued expenses.

Cash provided by operating activities for the year ended December 30, 2023 was $265.2 million and consisted of net income of $76.3 million, non-cash items of $124.0 million, and an inflow of $64.9 million from a net decrease in operating assets and liabilities. The inventory decrease of $31.5 million is due to improvements in supply chain process resulting in lower inventory levels and lower volumes. The third-party production prepayments decrease of $27.8 million is due to expensing of these prepayments over the respective contract terms. The accrued expenses and other current liabilities increase of $13.9 million is primarily due to increases in accrued incentive compensation compared to the prior year. The accounts receivable increase of $10.3 million is primarily due timing of shipments in the month of December compared to the prior year.

Cash provided by operating activities for the year ended December 31, 2022 was $199.9 million and consisted of net income of $67.3 million, non-cash items of $142.4 million and outflows of $9.7 million from net increases in operating assets and liabilities. The change is primarily due to a net decrease in operating assets and liabilities in fiscal 2023 compared to a net increase in fiscal 2022.

The Company used $62.4 million in investing activities during the year ended December 30, 2023, as compared to $88.5 million during the year ended December 31, 2022. Investing activities during both periods primarily consisted of capital investments made mostly in the Company’s breweries to drive efficiencies and cost reductions and support product innovation and potential future growth.

Cash used in financing activities was $84.8 million during the year ended December 30, 2023, as compared to $2.8 million provided by during the year ended December 31, 2022. The change is primarily due to $92.9 million in repurchases of Class A common stock in fiscal 2023.

During fiscal year 2023, the Company repurchased and subsequently retired 276,045 shares of its Class A Common Stock, respectively, for an aggregate purchase price of $92.9 million. As of December 30, 2023, the Company had repurchased a cumulative total of approximately 14.1 million shares of its Class A Common Stock for an aggregate purchase price of approximately $933.5 million and had approximately $266.5 million remaining on the $1.2 billion stock repurchase expenditure limit set by the Board of Directors.

The Company expects that its cash balance as of December 30, 2023 of $298.5 million and future operating cash flows, along with its $150.0 million credit facility agreement, will be sufficient to fund future cash requirements. Refer to Note K of the Notes to the Consolidated Financial Statements within Part II, Item 8 of this Form 10-K for further details of the terms of the credit facility agreement. 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.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

Provision for Excess or Expired Inventory

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The provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various raw material ingredients and finished goods. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provision for excess or expired inventory included in cost of goods sold was $19.3 million, $35.9 million, and $62.6 million in fiscal years 2023, 2022, and 2021 respectively.

Valuation of Property, Plant, and Equipment

The carrying value of property, plant, and equipment, net of accumulated depreciation, at December 30, 2023 was $642.5 million. For purposes of determining whether there are any impairment losses on brewery assets, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. If an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of potential impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, the remaining useful life of the asset, and the usefulness of the asset in consideration of future business plans. Impairment of brewery assets classified as property, plant, and equipment included in operating expenses was $5.0 million, $2.6 million and $18.5 million in fiscal years 2023, 2022, and 2021, respectively.

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

Valuation of Goodwill and Indefinite Lived Intangible Assets

The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.

The Company’s annual goodwill impairment evaluation analysis conducted at the end of fiscal August indicated that the fair value of the Company’s goodwill was substantially greater than the carrying value and accordingly there was no impairment to record during fiscal 2023. The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit, of which the Company has one, is less than its carrying amount or to proceed directly to performing a quantitative impairment test. Under the quantitative assessment, the estimated fair value of the Company’s reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the Company’s reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the Company’s market capitalization and enterprise value. If the estimated fair value of the Company’s reporting unit is less than the carrying value of its reporting unit, a goodwill impairment will be recognized. In estimating the fair value of the Company’s reporting unit, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, cost of capital, and other factors. The assumptions used in the estimate of fair value are based on historical trends and the projections and assumptions that are used in the latest operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for the Company’s goodwill which could have a material adverse impact on the Company’s financial statements.

The Company’s intangible assets consist primarily of a trademark and customer relationships obtained through the Company’s Dogfish Head acquisition. Customer relationships are amortized over their estimated useful lives. The Dogfish Head trademark which was determined to have an indefinite useful life is not amortized. The guidance for indefinite lived

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intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. Under the quantitative assessment, the trademark is evaluated for impairment by comparing the carrying value of the trademark to its estimated fair value. The estimated fair value of the trademark is calculated based on an income approach using the relief from royalty method. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value.

Significant judgment is required to estimate the fair value the Dogfish Head trademark. Accordingly, the Company obtains the assistance of third-party valuation specialists as part of the impairment evaluation. In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, the discount rate, and the after-tax royalty savings expected from ownership of the trademark. The assumptions and projections used in the estimate of fair value are consistent with recent trends and represent the projections used in the Company’s current strategic operating plans which include reductions in revenues from the Dogfish Head beer products which were partially offset with revenue growth from the new Dogfish Head canned cocktails products that were launched in 2021. These assumptions reflect management’s estimates of future economic and competitive conditions and consider many factors including macroeconomic conditions, industry growth rates, and competitive activities and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an additional impairment charge for the asset. The recognition of any resulting impairment charge could have a material adverse impact on the Company's financial statements.

The Company performed a sensitivity analysis on its significant assumptions used in the Dogfish Head trademark fair value calculation and determined the following:

•
A decrease in the annual forecasted revenue growth rate of 1.0% would result in a 5.2% decrease to the current fair value of $55.6 million.

•
An increase in the discount rate of 1.5% would result in a 11.7% decrease to the current fair value of $55.6 million.

Revenue Recognition and Classification of Customer Programs and Incentives

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 December 30, 2023 and December 31, 2022, the Company had deferred revenue of $8.9 million and $6.8 million, respectively, related to product shipped prior to these dates for which the criteria to recognize revenue was not met as of these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of its products in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys or offers credits for stale beer that is returned or destroyed by Distributors. The Company generally credits approximately fifty percent of the distributor’s cost of beer that has passed its freshness expiration date when it is returned to the Company or destroyed. The Company reduces revenue and establishes an accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue. Historically, the cost of actual stale beer returns has been in line with established reserves; however, the cost could differ materially from the reserves which would impact revenue. As of December 30, 2023, and December 31, 2022, the stale beer reserve was $8.2 million and $5.6 million, respectively. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

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 the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to, point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $106.4 million, $95.9 million and $126.1 million in fiscal years

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2023, 2022, and 2021, respectively. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2023, 2022, and 2021 were $62.6 million, $54.8 million and $72.7 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. The agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company; however, the amounts could differ from the estimated allowances.

Customer incentives and other payments are made primarily to Distributors based upon the performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2023, 2022, and 2021 were $43.8 million, $41.1 million and $53.4 million, respectively. In fiscal years 2023, 2022, and 2021, the Company recorded certain of these costs in the total amount of $31.4 million, $29.9 million and $42.0 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.

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

Stock-Based Compensation

The Company accounts for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures. Stock-based compensation was $17.0 million, $14.0 million and $18.6 million in fiscal years 2023, 2022, and 2021, respectively.

As permitted by ASC 718, the Company elected to use a lattice model, such as the trinomial option-pricing model, to estimate the fair values of stock options. All option-pricing models require the input of subjective assumptions. These assumptions include the estimated volatility of the Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and expected exercise behavior. See Note N for further discussion of the application of the option-pricing models.

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

Business Environment

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

The High End category and the Beyond Beer category within the United States are highly competitive due to large domestic and international brewers and the increasing number of craft brewers in this category who distribute similar products that have similar pricing and target drinkers. The Company believes that its pricing is appropriate given the quality and reputation of its brands, while realizing that economic pricing pressures may affect future pricing levels. Large domestic and international brewers are able to compete more aggressively than the Company, as they have substantially greater resources, marketing strength and distribution networks than the Company. The Company anticipates competition among domestic craft brewers will remain strong, as the number of craft brewers continues to grow. The Company also increasingly competes with wine and spirits companies, some of which have significantly greater resources than the Company. This competitive environment may affect the Company’s overall performance within the High End category. As the market matures and the High End category continues to consolidate, the Company believes that companies that are well-positioned in terms of brand equity, marketing and distribution will have greater success than those who do not. With its over 300 Distributors nationwide and the Company’s sales force of over 475 people, as well as a commitment to maintaining its innovation capability, brand equity and quality, the Company believes it is well positioned to compete in the High End Beer category.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has elected to omit discussion of the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" located in the Company's Form 10-K for the fiscal year ended December 25, 2021, filed on February 22, 2022, for reference to discussion of the fiscal year ended December 26, 2020, the earliest of the three fiscal years presented.

Forward-Looking Statements

In this Form 10-K and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-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 above and the other information set forth in this Form 10-K.

Introduction

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

Most of the Company’s beverages which include hard seltzers, flavored malt beverages, beers, and hard ciders, are primarily positioned in the market for High End beer occasions. High End beers and beer occasions (the “High End category”) are determined by higher price, quality, image and taste, as compared with regular domestic beers. Boston Beer is one of the largest suppliers in the High End category in the United States. The High End category has seen high single-digit compounded annual growth over the past ten years. The Company believes that the High End category is positioned to increase market share in the total beer category, as drinkers continue to trade up in taste and quality. The Company estimates that the High End full year percentage volume changes in 2020, 2021 and 2022 were approximately 25%, 2%, and (3%), respectively. These trends are above the estimated United States beer market volume changes in 2020, 2021 and 2022, of 10%, (5%), and (5%), respectively.

The market for hard seltzer products has experienced declining annual volume growth rate trends from estimated growth of 158% in 2020 and 13% in 2021 to an estimated decline of 15% in 2022. The decline in volume trends has negatively impacted the Company's volume of depletions and shipments, as well as its projections for the future. The decline in volume trends resulted in several supply chain related costs recorded during the second half of 2021 and has continued to negatively impact the Company’s financial results during 2022. These costs include provisions for excess and obsolete inventories, property, plant and equipment impairments, write-offs of third-party production prepayments and provisions for costs associated with the termination of various third-party production contracts.

Depletions, or Distributor sales to retailers, of the Company’s beverages for the 53 week fiscal period ended December 31, 2022, decreased approximately 5% from the comparable 52 week fiscal period in the prior year.

Depletions of the Company’s beverages for the 52 week fiscal period ended December 25, 2021, increased approximately 22% from the comparable 52 week fiscal period in the prior year.

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Results of Operations

Year Ended December 31, 2022 (53 weeks) Compared to Year Ended December 25, 2021 (52 weeks)

Introduction. Comparisons between fiscal year 2022 and 2021 results are impacted by the $196.4 million in direct and indirect pre-tax costs recorded in fiscal 2021 resulting from the 2021 slowdown in hard seltzer category growth. Those costs included inventory obsolescence related costs of $59.5 million, unfavorable absorption impacts at Company-owned breweries and downtime charges at third-party breweries of $38.8 million, contract termination costs, primarily for excess third-party contract production, of $30.7 million, increased materials sourcing and warehousing costs of $28.0 million, customer return provisions for out of code or damaged products of $19.7 million, equipment impairments of $12.7 million and other costs of $7.0 million. The total direct costs of $102.9 million and total indirect costs of $93.5 million, which combined total $196.4 million, were recorded in the fiscal year 2021 financial statements as a $16.1 million reduction in net revenue, $136.9 million increase in cost of goods sold, $30.7 million in contract termination fees, and $12.7 million in impairments of brewery assets.

Net revenue. Net revenue increased by $32.7 million, or 1.6%, to $2,090.3 million for the year ended December 31, 2022, as compared to $2,057.6 million for the year ended December 25, 2021, primarily as a result of price increases of $97.0 million partially offset by lower shipment volume of $58.9 million and higher returns of $10.1 million.

Volume. Total shipment volume of 8,183,000 barrels for the year ended December 31, 2022 decreased by 3.8% over 2021 levels of 8,504,000 barrels, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Dogfish Head, and Samuel Adams brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands. Shipment volume decreased 4.6% on a 52-week comparable basis.

Depletions of the Company’s products for the year ended December 31, 2022 decreased by approximately 5% compared to the prior year, reflecting decreases in the Company’s Truly Hard Seltzer, Angry Orchard, Dogfish Head, and Samuel Adams brands, partially offset by increases in its Twisted Tea and Hard Mountain Dew brands. On a 52-week comparable basis, depletions decreased 6% from fiscal year 2021.

The Company believes distributor inventory as of December 31, 2022 averaged approximately five weeks on hand and was at an appropriate level for each of its brands.

Net Revenue per barrel. The net revenue per barrel increased by 5.6% to $255.44 per barrel for the year ended December 31, 2022, as compared to $241.97 per barrel for the year ended December 25, 2021, primarily due to price increases, partially offset by higher returns.

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Cost of goods sold. Cost of goods sold was $150.10 per barrel for the year ended December 31, 2022, as compared to $148.15 per barrel for the year ended December 25, 2021. The 2022 increase in cost of goods sold of $1.95 or 1.32% per barrel was primarily due to current year inflationary impacts of $48.5 million, or $5.93 per barrel, higher per barrel brewery processing costs of $36.9 million, or $4.51 per barrel, higher inventory obsolescence costs of $25.1 million, or $3.07 per barrel, increased warehousing and pallet costs of $13.5 million, or $1.65 per barrel, partially offset by costs recorded in 2021 resulting from the slowdown of hard seltzer of $136.9 million, or $16.73 per barrel.

Inflationary impacts of $48.5 million consist primarily of increased costs of cans of $25.0 million, cardboard of $9.7 million, utilities of $3.0 million and sweetener ingredients of $2.2 million.

Supply chain constraints in package materials, primarily cans, have impacted production schedules and increased can costs, as a result of using a more expensive supplier. During fiscal 2022 and 2021, the additional can costs related to use of this more expensive supplier were $3.6 million and $22.4 million, respectively. These supply chain constraints in package materials did not otherwise have a material impact on the Company’s results of operations or capital resources.

Gross profit. Gross profit was $105.33 per barrel for the year ended December 31, 2022, as compared to $93.82 per barrel for the year ended December 25, 2021. Gross margin was 41.2% for the year ended December 31, 2022, as compared to 38.8% for the year ended December 25, 2021. The increase was primarily due to costs recorded in fiscal year 2021 resulting from the slowdown of hard seltzer category growth and full year 2022 increased pricing, which was partially offset by inflationary cost increases, primarily experienced in increased packaging, ingredient, and energy costs, as well as higher inventory obsolescence costs, unfavorable product mix, and higher returns.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to other entities that classify costs related to distribution differently.

Advertising, promotional, and selling expenses. Advertising, promotional and selling expenses, decreased $28.6 million, or 4.7%, to $578.4 million for the year ended December 31, 2022, as compared to $607.0 million for the year ended December 25, 2021. The decrease was primarily due to a net decrease in brand investments of $51.2 million, mainly driven by lower media costs, partially offset by higher salaries and benefits costs of $16.5 million. Freight to distributors was flat as higher rates were offset by lower volumes.

Advertising, promotional and selling expenses were 27.7% of net revenue, or $70.68 per barrel, for the year ended December 31, 2022, as compared to 29.5% of net revenue, or $71.38 per barrel, for the year ended December 25, 2021. The Company will invest in advertising and promotional campaigns that it believes are effective, but there is no guarantee that such investment will generate sales growth.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to between 2% and 3% of net sales. The Company may adjust its promotional efforts in the Distributors’ markets, if changes occur in these promotional contribution arrangements, depending on the industry and market conditions.

General and administrative expenses. General and administrative expenses increased by $23.9 million, or 17.9%, to $157.5 million for the year ended December 31, 2022, as compared to $133.6 million for the comparable period in 2021. The increase was primarily due to increased salaries and benefits costs.

Impairment of intangible assets. Impairment of intangible assets reflects a $27.1 million non-cash impairment charge recorded for the Dogfish Head brand, taken as a result of the Company’s annual impairment analysis as of September 1, 2022. See further discussion in Note I to the Consolidated Financial Statements within Part II, Item 8 of this Form 10-K .

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Impairment of brewery assets. Impairment of brewery assets decreased $15.7 million from the prior year, primarily due to the impairment of assets that were directly related to the Truly slowdown in 2021 that did not recur in 2022.

Income tax provision (benefit). The Company’s effective tax rate for full-year 2022 was a tax provision of 26.4% compared to a benefit of 110.7% in 2021. This change in rate was primarily due to the impact of changes in the tax benefit from stock option activity recorded in accordance with ASU 2016-09 and the impact of lower pretax income for the full-year 2021 compared to 2022. In full year 2022 and 2021, the Company recorded a tax benefit of $0.06 per diluted share and $0.85 per diluted share, respectively, resulting from stock activity recorded under ASU 2016-09.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its existing cash balances, cash flows from operating activities and amounts available under its revolving credit facility. The Company’s material cash requirements include working capital needs, satisfaction of contractual commitments, and investment in the Company’s business through capital expenditures.

Cash and cash equivalents and restricted cash increased to $180.6 million as of December 31, 2022 from $66.3 million as of December 25, 2021, reflecting cash provided by operating activities and proceeds from the exercise of stock options and sale of investment shares, partially offset by purchases of property, plant, and equipment and payments of tax withholdings on stock-based payment awards and investment shares.

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

Cash provided by operating activities for the year ended December 31, 2022 was $199.9 million and consisted of non-cash items of $142.4 million and net income of $67.3 million, partially offset by a net increase in operating assets and liabilities of $9.7 million. The prepaid expenses, income tax receivable, and other current assets decrease of $38.7 million is primarily driven by income tax refunds received during the second quarter of 2022. The third-party production prepayments decrease of $27.0 million is primarily due to expensing of these prepayments over the respective contract terms. The accrued expenses and other current liabilities decrease of $50.4 million is primarily due to a prior year wholesaler transaction payment and the payment of hard seltzer category slowdown specific accruals. The other assets increase of $14.0 million is primarily due to an increase in capitalized cloud computing implementation costs.

Cash provided by operating activities for the year ended December 25, 2021 was $56.3 million and primarily consisted of non-cash items of $111.6 million and net income of $14.5 million, partially offset by a net increase in operating assets and liabilities of $69.9 million. The increase in cash provided by operating activities for the year ended December 31, 2022 compared to the prior year is primarily due to higher net income, income tax refunds received, and decreases in third-party production prepayments.

The Company used $88.5 million in investing activities during the year ended December 31, 2022, as compared to $146.6 million during the year ended December 25, 2021. Investing activities during both periods 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 $2.8 million during the year ended December 31, 2022, as compared to $6.6 million used during the year ended December 25, 2021. The $9.4 million increase in cash provided by financing activities in 2022 from 2021 is primarily due to lower tax withholdings on stock-based payment awards and investment shares, partially offset by lower proceeds from exercises of stock options and sales of investment shares.

During the year ended December 31, 2022 the Company did not repurchase any shares of its Class A Common Stock. During the period from January 1, 2023 through February 17, 2023, the Company repurchased 29,007 shares of its Class A Common Stock for an aggregate purchase price of $10.3 million. As of February 17, 2023, 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 $851.0 million and had approximately $80.0 million remaining on the $931.0 million stock repurchase expenditure limit set by the Board of Directors.

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The Company expects that its cash balance as of December 31, 2022 of $180.6 million, along with future operating cash flows, will be sufficient to fund future cash requirements. During the fourth quarter of 2022 the Company amended its $150.0 million credit facility agreement, which now has a term not scheduled to expire until December 16, 2027. Refer to Note L of the Notes to Consolidated Financial Statements for further details of the terms of the agreement. 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.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

Provision for Excess or Expired Inventory

The provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various ingredients and finished goods. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provision for excess or expired inventory included in cost of goods sold was $35.9 million, $62.6 million and $11.3 million in fiscal years 2022, 2021, and 2020, respectively.

Valuation of Property, Plant, and Equipment

The carrying value of property, plant, and equipment, net of accumulated depreciation, at December 31, 2022 was $667.9 million. For purposes of determining whether there are any impairment losses, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. If an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, the remaining useful life of the asset, and the usefulness of the asset in consideration of future business plans. Impairment of assets classified as property, plant, and equipment included in operating expenses was $2.6 million, $18.5 million and $4.4 million in fiscal years 2022, 2021, and 2020, respectively.

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

Valuation of Goodwill and Indefinite Lived Intangible Assets

The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.

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The Company’s annual goodwill impairment evaluation analysis conducted at the end of fiscal August indicated that the fair value of the Company’s goodwill was substantially greater than the carrying value and accordingly there was no impairment to record during fiscal 2022. The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit, of which the Company has one, is less than its carrying amount or to proceed directly to performing a quantitative impairment test. Under the quantitative assessment, the estimated fair value of the Company’s reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the Company’s reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the Company’s market capitalization and enterprise value. If the estimated fair value of the Company’s reporting unit is less than the carrying value of its reporting unit, a goodwill impairment will be recognized. In estimating the fair value of the Company’s reporting unit, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, cost of capital, and other factors. The assumptions used in the estimate of fair value are based on historical trends and the projections and assumptions that are used in the latest operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for the Company’s goodwill which could have a material adverse impact on the Company’s financial statements.

The Company’s intangible assets consist primarily of a trademark and customer relationships obtained through the Company’s Dogfish Head acquisition. Customer relationships are amortized over their estimated useful lives. The Dogfish Head trademark which was determined to have an indefinite useful life is not amortized. The guidance for indefinite lived intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. Under the quantitative assessment, the trademark is evaluated for impairment by comparing the carrying value of the trademark to its estimated fair value. The estimated fair value of the trademark is calculated based on an income approach using the relief from royalty method. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value. The Company’s annual intangible asset impairment evaluation analysis conducted on September 1st (“the fiscal 2022 measurement date”) indicated that the fair value of the Company's Dogfish Head trademark intangible asset was less than the carrying value. Accordingly, an impairment charge of $27.1 million was recorded during the third quarter of fiscal 2022.

Significant judgement is required to estimate the fair value the Dogfish Head trademark. Accordingly, the Company obtains the assistance of third-party valuation specialists as part of the impairment evaluation. In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, the discount rate, and the after-tax royalty savings expected from ownership of the trademark. The assumptions and projections used in the estimate of fair value are consistent with recent trends and represent the projections used in the Company’s current strategic operating plans which include reductions in revenues from the Dogfish Head beer products which were partially offset with revenue growth from the new Dogfish Head canned cocktails products that were launched in 2021. These assumptions reflect management’s estimates of future economic and competitive conditions and consider many factors including macroeconomic conditions, industry growth rates, and competitive activities and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an additional impairment charge for the asset. The recognition of any resulting impairment charge could have a material adverse impact on the Company's financial statements.

The Company performed a sensitivity analysis on its significant assumptions used in the Dogfish Head trademark fair value calculation and determined the following:

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A decrease in the annual forecasted revenue growth rate of 1.0% would result in a 5.9% decrease to the fair value of $71.4 million as of the fiscal 2022 measurement date.

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A decrease in the discount rate of 1.5% would result in a 16.0% increase to the fair value of $71.4 million as of the fiscal 2022 measurement date, while an increase in the discount rate of 1.5% would result in a 12.2% decrease to the fair value of $71.4 million as of the fiscal 2022 measurement date.

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Revenue Recognition and Classification of Customer Programs and Incentives

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 December 31, 2022 and December 25, 2021, the Company has deferred $6.8 million and $8.0 million, respectively, in revenue related to product shipped prior to these dates for which the criteria for recognition of revenue was not met as of these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of the product in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys stale beer that is returned by Distributors. The Company generally credits approximately fifty percent of the distributor’s cost of the beer that has passed its expiration date for freshness when it is returned to the Company or destroyed. The Company reduces revenue and establishes an accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue. Historically, the cost of actual stale beer returns has been in line with established reserves, however, the cost could differ materially from the estimated reserve which would impact revenue. Provisions for returns included as reductions to net revenue were $19.6 million, $9.5 million and $8.4 million in fiscal years 2022, 2021, and 2020, respectively. As of December 31, 2022 and December 25, 2021, the stale beer reserve was $5.6 million and $6.0 million, respectively.

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 promoting the Company’s products may include, but are not limited to point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations, and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $95.9 million, $126.1 million and $85.0 million in fiscal year 2022, 2021, and 2020, respectively. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2022, 2021, and 2020 were $54.8 million, $72.7 million and $59.3 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. The agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.

Customer incentives and other payments are made primarily to Distributors based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2022, 2021, and 2020 were $41.1 million, $53.4 million and $25.7 million, respectively. In fiscal 2022, 2021, and 2020, the Company recorded certain of these costs in the total amount of $29.9 million, $42.0 million, and $23.1 million, respectively, as reductions to net revenue. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

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

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Stock-Based Compensation

The Company accounts for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures. Stock-based compensation was $14.0 million, $18.6 million and $15.3 million in fiscal years 2022, 2021, and 2020, respectively.

As permitted by ASC 718, the Company elected to use a lattice model, such as the trinomial option-pricing model, to estimate the fair values of stock options. All option-pricing models require the input of subjective assumptions. These assumptions include the estimated volatility of the Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and expected exercise behavior. See Note N of the Notes to Consolidated Financial Statements for further discussion of the application of the option-pricing models.

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

Business Environment

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

The High End category and the Beyond Beer category within the United States are highly competitive due to large domestic and international brewers and the increasing number of craft brewers in this category who distribute similar products that have similar pricing and target drinkers. The Company believes that its pricing is appropriate given the quality and reputation of its brands, while realizing that economic pricing pressures may affect future pricing levels. Large domestic and international brewers are able to compete more aggressively than the Company, as they have substantially greater resources, marketing strength and distribution networks than the Company. The Company anticipates competition among domestic craft brewers will remain strong, as the number of craft brewers continues to grow. The Company also increasingly competes with wine and spirits companies, some of which have significantly greater resources than the Company. This competitive environment may affect the Company’s overall performance within the High End category. As the market matures and the High End category continues to consolidate, the Company believes that companies that are well-positioned in terms of brand equity, marketing and distribution will have greater success than those who do not. With its over 400 Distributors nationwide and the Company’s sales force of over 500 people, as well as a commitment to maintaining its innovation capability, brand equity and quality, the Company believes it is well positioned to compete in the High End Beer category.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

In this Form 10-K and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed,” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations, and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect future events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-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 above and the other information set forth in this Form 10-K.

Introduction and Slowdown of the Hard Seltzer Market Impact

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

Most of the Company’s beverages which include hard seltzers, beers, and hard ciders, are primarily positioned in the market for High End beer occasions. The High End category has seen high single-digit compounded annual growth over the past ten years. The Company believes that the High End category is positioned to increase market share in the total beer category, as drinkers continue to trade up in taste and quality. Boston Beer is one of the largest suppliers in the High End category in the United States. In measured off-premise channels, the Company estimates that its full year percentage volume growth in 2020 and 2021 was approximately 25% and 2%, respectively. These trends are significantly above the total beer category percentage volume growth of 10% in 2020 and a decline of approximately 5% in 2021. The Company believes that the High End category is now over 38% of the United States beer market and the Company has approximately a 11% market share of the High End category. Depletions or Distributor sales to retailers of the Company’s beverages for the 52 week fiscal period ended December 25, 2021, increased approximately 22% from the comparable 52 week fiscal period in the prior year.

During the year ended December 25, 2021, the market for hard seltzer products experienced decelerating growth trends, which resulted in the annual volume growth rate declining from 158% in 2020 to 13% in 2021. The slowdown in growth trends greatly impacted the Company's volume of production and shipments, as well as its projections for the future. The volume reduction resulted in several supply chain related costs recorded during the second half of the year. These costs include provisions for excess and obsolete inventories, property, plant and equipment impairments, write-offs of third-party production prepayments and provisions for costs associated with the termination of various third-party production contracts.

During the year ended December 25, 2021, the Company recorded excess and obsolete inventory reserves and other inventory related costs totaling $59.5 million related specifically to a decline in future volume projections, inclusive of estimated destruction costs of $6.1 million. The reserves were recorded for inventory that the Company believes will expire, not be used or otherwise offers no net realizable value to the Company based on its current volume and production forecasts. These reserves were recorded for Truly finished goods inventory that is not expected to be sold prior to expiration, Truly packaging, Truly flavorings and other raw materials that are not projected to be used or will expire prior to being used in production. The actual write-offs and costs to destroy the inventory identified as excess and obsolete may vary from this estimate. The inventory related reserves were recorded within cost of goods sold.

The Company has several third-party production agreements in place to meet the expected increased demand for Truly. Due to the volume slowdown, the Company determined that not all of these agreements are needed to meet adjusted expected demand. Several of these agreements included guaranteed payments and payments for capital expenditures incurred by the third-parties that the Company is still obligated to pay. During the year ended December 25, 2021, the Company recorded contract termination costs totaling $14.8 million, which are recorded within contract termination costs and other. Additionally, the Company wrote off $9.5 million of amounts prepaid pursuant to a third-party production agreement that the Company has no future plans to utilize. Also pursuant to that third-party production agreement, the Company expects to incur shortfall fees of $10.3 million. These shortfall fees have been factored into the Company's estimates of future performance and financial outlook and are explained in greater detail within Note J of the financial statements.

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Due to the reduction in its production volume projections, the Company evaluated its construction in progress capital projects to determine if the assets would generate future economic benefits and concluded that certain projects were impaired. During the year ended December 25, 2021 the Company recognized impairment expense of $12.7 million related to projects that will be cancelled due to the volume slowdown and a provision of $6.3 million for amounts owed to third-parties under non-cancellable purchase orders for components of the cancelled projects which was recorded within contract termination costs and other.

The combined expense of $102.9 million recognized during the year ended December 25, 2021 for the above items contributed to the Company's decrease in operating income from the prior year.

Results of Operations

Year Ended December 25, 2021 Compared to Year Ended December 26, 2020

Slowdown of Hard Seltzer Category Impact. The results for the year ended December 25, 2021 include direct costs resulting from the slowdown of the hard seltzer category of $102.9 million, before the related tax benefit. These costs include inventory obsolescence, estimated destruction costs and other inventory related costs of $59.5 million, contract termination costs primarily for excess third-party contract production of $30.7 million and construction in progress impairments of $12.7 million. The total direct costs of $102.9 million have been recorded in financial statements for the year ended December 25, 2021 as a $59.5 million increase in cost of goods sold, $30.7 million in contract termination fees and $12.7 million in impairments of assets.

In addition, the results for the year ended December 25, 2021 include indirect costs resulting from the slowdown of the hard seltzer category of $93.5 million, before the related tax benefit. These costs include unfavorable absorption impacts at Company-owned breweries and downtime charges at third party breweries of $38.8 million, increased raw materials sourcing and warehousing costs of $28.0 million and provisions for out of code or damaged products of $19.7 million and other costs of $7.0 million. The total costs of $93.5 million have been recorded in financial statements for the year ended December 25, 2021 as a $16.1 million reduction in net revenue and a $77.4 million increase in cost of goods sold.

Net revenue. Net revenue increased by $321.2 million, or 18.5%, to $2,057.6 million for the year ended December 25, 2021, as compared to $1,736.4 million for the year ended December 26, 2020, due primarily to increased shipments.

Volume. Total shipment volume of 8,504,000 barrels for the year ended December 25, 2021 increased by 15.4% over 2020 levels of 7,368,000 barrels, due primarily to increases in shipments of the Company’s Twisted Tea, Truly Hard Seltzer, Samuel Adams, Angry Orchard and Dogfish Head brands.

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Depletions, or sales by Distributors to retailers, of the Company’s products for the year ended December 25, 2021 increased by approximately 22% compared to the prior year, primarily due to increases in depletions of the Company’s Truly Hard Seltzer, Twisted Tea, Samuel Adams and Dogfish Head brands, partially offset by decreases in its Angry Orchard brand.

Net Revenue per barrel. The net revenue per barrel increased by 2.7% to $241.97 per barrel for the year ended December 25, 2021, as compared to $235.67 per barrel for the year ended December 26, 2020, primarily due to price increases partially offset by unfavorable package mix.

Cost of goods sold. Cost of goods sold was $148.15 per barrel for the year ended December 25, 2021, as compared to $125.13 per barrel for the year ended December 26, 2020. The 2021 increase in cost of goods sold of $23.02 or 18.4% per barrel was primarily the result of $136.9 million direct and indirect volume adjustment costs, described above, and higher materials cost.

Gross profit. Gross profit was $93.82 per barrel for the year ended December 25, 2021, as compared to $110.54 per barrel for the year ended December 26, 2020. Gross margin was 38.8% for the year ended December 25, 2021, as compared to 46.9% for the year ended December 26, 2020.

The Company includes freight charges related to the movement of finished goods from manufacturing locations to Distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to other entities that classify costs related to distribution differently.

Advertising, promotional and selling. Advertising, promotional and selling expenses, increased $159.4 million, or 35.6%, to $607.0 million for the year ended December 25, 2021, as compared to $447.6 million for the year ended December 26, 2020. The increase was primarily the result of increased brand investments of $90.4 million, mainly driven by higher media, production and local marketing investments and increased freight to distributors of $69.9 million that was primarily due to higher rates and volumes.

Advertising, promotional and selling expenses were 29.5% of net revenue, or $71.38 per barrel, for the year ended December 25, 2021, as compared to 25.8% of net revenue, or $60.74 per barrel, for the year ended December 26, 2020. The Company will invest in advertising and promotional campaigns that it believes are effective, but there is no guarantee that such investment will generate sales growth.

The Company conducts certain advertising and promotional activities in its Distributors’ markets, and the Distributors make contributions to the Company for such efforts. These amounts are included in the Company’s statement of operations as reductions to advertising, promotional and selling expenses. Historically, contributions from Distributors for advertising and promotional activities have amounted to between 2% and 3% of net sales. The Company may adjust its promotional efforts in the Distributors’ markets, if changes occur in these promotional contribution arrangements, depending on the industry and market conditions.

General and administrative. General and administrative expenses increased by $15.4 million, or 13.0%, to $133.6 million for the year ended December 25, 2021, as compared to $118.2 million for the comparable period in 2020. The increase was primarily due to increases in external services and salaries and benefits costs.

Impairment of assets. For the year ended December 25, 2021, the Company incurred impairment charges of $18.5 million, based upon its review of the carrying values of its property, plant and equipment. These impairment charges were primarily due to write-downs of equipment related to the slowdown of the hard seltzer category.

Stock-based compensation expense. For the year ended December 25, 2021, an aggregate of $18.6 million in stock-based compensation expense is included in advertising, promotional and selling expenses and general and administrative expenses. Stock compensation increased by $3.3 million in 2021 compared to 2020, primarily due to achievement of performance-based awards.

Provision for income taxes. The Company’s effective tax rate for 2021 was a benefit of 110.7% compared to a tax provision of 21.4% in the prior year. This change in rate was primarily due to the impact of changes in the tax benefit from stock option

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activity recorded in accordance with ASU 2016-09 and the impact of lower pretax income for the full year 2021 compared to 2020.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are its existing cash balances, cash flows from operating activities and amounts available under its revolving credit facility. The Company’s material cash requirements include working capital needs, satisfaction of contractual commitments, and investment in the Company’s business through capital expenditures.

Cash and cash equivalents and restricted cash decreased to $66.3 million as of December 25, 2021 from $163.3 million as of December 26, 2020, reflecting purchases of property, plant and equipment and payment of tax withholding on stock-based payment awards and investment shares, partially offset by cash provided by operating activities and proceeds from exercise of stock options and sale of investment shares.

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

Cash provided by operating activities decreased from $253.4 million in 2020 to $56.3 million in 2021 principally as a result of lower net income due to the slowdown of the hard seltzer market and increases in income tax receivables.

Cash used in investing activities increased from $139.1 million in 2020 to $146.6 million in 2021, primarily as a result of capital investments made mostly in the Company’s breweries to increase capacity, drive efficiencies and cost reductions, and support product innovation.

Cash used by financing activities was $6.6 million during 2021, as compared to $12.3 million provided by financing activities during 2020. The $19.0 million decrease in cash provided by financing activities in 2021 from 2020 is primarily due to higher payment of tax withholding on stock-based payment awards and investment shares.

In 1998, the Board of Directors authorized management to implement a stock repurchase program. During the year ended December 25, 2021, the Company did not repurchase any shares of its Class A Common Stock under the stock repurchase program. As of December 25, 2021, 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. From December 26, 2021 through February 18, 2022, the Company did not repurchase any shares of its Class A Common Stock. The Company has approximately $90.3 million remaining on the $931.0 million stock repurchase expenditure limit set by the Board of Directors.

The Company’s $150.0 million credit facility has a term scheduled to expire 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 and has drawn $20.0 million under the credit facility, which it anticipates repaying during its second fiscal quarter. See Note L of the Notes to Consolidated Financial Statements for further information regarding the Company’s revolving credit facility. To provide additional funding for its longer term liquidity needs, the Company intends to seek an extension of or replacement for its existing credit facility prior to its scheduled expiration in 2023.

The Company believes that its cash balance as of December 25, 2021 of $26.8 million, along with future cash flows from operations, amounts available under the Company’s existing revolving line of credit, and the Company’s ability to obtain future external financing, will be sufficient to fund the Company’s cash requirements for the next 12 months and in the longer term.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. The more judgmental estimates are summarized below. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other

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assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

Provision for Excess or Expired Inventory

The provisions for excess or expired inventory are based on management’s estimates of forecasted usage of inventories on hand. Forecasting usage involves significant judgments regarding future demand for the Company’s various existing products and products under development as well as the potency and shelf-life of various ingredients and finished goods. A significant change in the timing or level of demand for certain products as compared to forecasted amounts may result in recording additional provisions for excess or expired inventory in the future. Provision for excess or expired inventory included in cost of goods sold was $62.6 million, $11.3 million and $8.1 million in fiscal years 2021, 2020 and 2019, respectively.

Valuation of Property, Plant and Equipment

The carrying value of property, plant and equipment, net of accumulated depreciation, at December 25, 2021 was $664.8 million. For purposes of determining whether there are any impairment losses, as further discussed below, management has historically examined the carrying value of the Company’s identifiable long-lived assets, including their useful lives, semi-annually, or more frequently when indicators of impairment are present. Evaluations of whether indicators of impairment exist involve judgments regarding the current and future business environment and the length of time the Company intends to use the asset. If an impairment loss is identified based on the fair value of the asset, as compared to the carrying value of the asset, such loss would be charged to expense in the period the impairment is identified. Furthermore, if the review of the carrying values of the long-lived assets indicates impairment of such assets, the Company may determine that shorter estimated useful lives are more appropriate. In that event, the Company will be required to record additional depreciation in future periods, which will reduce earnings. Estimating the amount of impairment, if any, requires significant judgments including identification of impairments, market comparison to similar assets, estimated cash flows to be generated by the asset, discount rates, the remaining useful life of the asset, and the usefulness of the asset in consideration of future business plans. Impairment of assets included in operating expenses was $18.5 million, $4.4 million and $0.9 million in fiscal years 2021, 2020 and 2019, respectively.

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

Valuation of Goodwill and Indefinite Lived Intangible Assets

The Company has recorded intangible assets with indefinite lives and goodwill for which impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs its annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date in the third quarter of each fiscal year or when circumstances arise that indicate a possible impairment or change in useful life might exist.

The Company’s annual goodwill impairment evaluation analysis conducted at the end of fiscal August indicated that the fair value of the Company’s goodwill was substantially greater than the carrying value and there was no impairment to record during 2021. The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit, of which the Company has one, is less than its carrying amount or to proceed directly to performing a quantitative impairment test. Under the quantitative assessment, the estimated fair value of the Company’s reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the Company’s reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach which considers the Company’s market capitalization and enterprise value. If the estimated fair value of the Company’s reporting unit is less than the carrying value of its reporting unit, a goodwill impairment will be recognized. In estimating the fair value of the Company’s reporting unit, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, cost of capital, and other factors. The assumptions used in the estimate of fair value are based on historical trends and the projections and assumptions that are used in the latest operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to recognize an impairment loss for the Company’s goodwill which could have a material adverse impact on the Company’s financial statements.

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The Company’s annual intangible asset impairment evaluation analysis conducted at the end of fiscal August indicated that the fair value of the intangible assets was greater than the carrying value and there was no impairment to record during 2021. The Company’s intangible assets consist primarily of a trademark and customer relationships obtained through the Company’s Dogfish Head acquisition. Customer relationships are amortized over their estimated useful lives. The Dogfish Head trademark which was determined to have an indefinite useful life is not amortized. The guidance for indefinite lived intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. Under the quantitative assessment, the trademark is evaluated for impairment by comparing the carrying value of the trademark to its estimated fair value. The estimated fair value of the trademark is calculated based on an income approach using the relief from royalty method. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value.

The fair value of the Dogfish Head trademark calculated in the third quarter of 2021 equaled 120.7% of its carrying value. The carrying value of the Dogfish Head trademark was $98.5 million as of December 25, 2021. Significant judgement is required to estimate the fair value the Dogfish Head trademark. Accordingly, the Company obtains the assistance of third-party valuation specialists as part of the impairment evaluation. In estimating the fair value of the trademark, management must make assumptions and projections regarding future cash flows based upon future revenues, the market-based royalty rate, the discount rate, the tax rate and other factors. These assumptions reflect management’s estimates of future economic and competitive conditions and consider many factors including macroeconomic conditions, industry growth rates, competitive activities, as well as the impact the COVID-19 pandemic has had on the Company. The assumptions and projections used in the estimate of fair value are consistent with historical trends and those used in current strategic operating plans which include growing the new Dogfish Head spirits RTD product line that was launched in 2021. The Company believes its assumptions are reasonable and comparable to those that would be used by other marketplace participants. The COVID-19 pandemic has continued to impact the Company's Dogfish Head brand through temporary closures and other restrictions of certain on-premise channels of distribution leading to a corresponding decline in net revenues generated from those on-premise channels compared to pre-pandemic periods. There continues to be a significant amount of uncertainty relating to how the pandemic will evolve and how governments and consumers will react.

The Company’s third quarter 2021 impairment evaluation assumes the pandemic’s impact on revenues will continue to abate during fiscal 2022 and significantly improve by the second half of fiscal 2022. If these estimates or the estimates related to new product lines and related assumptions change in the future, the Company may be required to recognize an impairment loss for the Dogfish Head trademark which could have a material adverse impact on the Company’s financial statements.

The Company performed a sensitivity analysis on our significant assumptions used in the Dogfish Head trademark fair value calculation, each of which we determined to be reasonable, and determined the following:

•
A decrease in the revenue growth rates of 42.5% would decrease the fair value calculation from 120.7% of carrying value to 100% of carrying value.

•
A decrease in the discount rate of 1.5% would increase the fair value to 149.1% of carrying value and an increase of the discount rate of 1.5% would decrease the fair value to 100.9% of carrying value.

Revenue Recognition and Classification of Customer Programs and Incentives

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 December 25, 2021 and December 26, 2020, the Company has deferred $8.0 million and $13.5 million, respectively in revenue related to product shipped prior to these dates. These amounts are included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.

The Company is committed to maintaining the freshness of the product in the market. In certain circumstances and with the Company’s approval, the Company accepts and destroys stale beer that is returned by Distributors. The Company generally credits approximately fifty percent of the distributor’s cost of the beer that has passed its expiration date for freshness when it is returned to the Company or destroyed. The Company reduces revenue and establishes an accrual based upon both historical returns, which is applied to an estimated lag time for receipt of product, and knowledge of specific return transactions. Estimating this reserve involves significant judgments and estimates, including comparability of historical

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return trends to future trends, lag time from date of sale to date of return, and product mix of returns. Stale beer expense is reflected in the accompanying financial statements as a reduction of revenue. Historically, the cost of actual stale beer returns has been in line with established reserves, however, the cost could differ materially from the estimated reserve which would impact revenue. As of December 25, 2021 and December 26, 2020, the stale beer reserve was $6.0 million and $3.1 million, respectively.

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 promoting the Company’s products may include, but are not limited to point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations, and meals, travel and entertainment. Amounts paid to customers in connection with these programs that were recorded as reductions to net revenue or as advertising, promotional and selling expenses totaled $126.1 million, $85.0 million and $75.2 million in fiscal year 2021, 2020 and 2019, respectively. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

Customer promotional discount programs are entered into with Distributors for certain periods of time. Amounts paid to Distributors in connection with these programs in fiscal years 2021, 2020 and 2019 were $72.7 million, $59.3 million and $43.9 million, respectively. The reimbursements for discounts to Distributors are recorded as reductions to net revenue. The agreed-upon discount rates are applied to certain Distributors’ sales to retailers, based on volume metrics, in order to determine the total discounted amount. The computation of the discount allowance requires that management make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Actual promotional discounts owed and paid have historically been in line with allowances recorded by the Company, however, the amounts could differ from the estimated allowance.

Customer incentives and other payments are made primarily to Distributors based upon performance of certain marketing and advertising activities. Depending on applicable state laws and regulations, these activities promoting the Company’s products may include, but are not limited to point-of-sale and merchandise placement, samples, product displays, promotional programs at retail locations and meals, travel and entertainment. Amounts paid to customers in connection with these programs in fiscal years 2021, 2020 and 2019 were $53.4 million, $25.7 million and $31.2 million, respectively. In fiscal 2021, 2020 and 2019, the Company recorded certain of these costs in the total amount of $42.0 million, $23.1 million, and $21.6 million, respectively, as reductions to net revenue. Costs recognized in net revenues include, but are not limited to, promotional discounts, sales incentives and certain other promotional activities. Costs recognized in advertising, promotional and selling expenses include point of sale materials, samples and media advertising expenditures in local markets. These costs are recorded as incurred, generally when invoices are received; however certain estimates are required at period end. Estimates are based on historical and projected experience for each type of program or customer and have historically been in line with actual costs incurred.

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

Stock-Based Compensation

The Company accounts for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), which generally requires recognition of share-based compensation costs in financial statements based on fair value. Compensation cost is recognized over the period during which an employee is required to provide services in exchange for the award (the requisite service period). The amount of compensation cost recognized in the consolidated statements of comprehensive income is based on the awards ultimately expected to vest, and therefore, reduced for estimated forfeitures. Stock-based compensation was $18.6 million, $15.3 million and $12.3 million in fiscal years 2021, 2020 and 2019, respectively.

As permitted by ASC 718, the Company elected to use a lattice model, such as the trinomial option-pricing model, to estimate the fair values of stock options. All option-pricing models require the input of subjective assumptions. These assumptions include the estimated volatility of the Company’s common stock price over the expected term, the expected dividend rate, the estimated post-vesting forfeiture rate, the risk-free interest rate and expected exercise behavior. See Note N of the Notes to Consolidated Financial Statements for further discussion of the application of the option-pricing models.

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

Business Environment

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

The High End category within the United States is highly competitive due to large domestic and international brewers and the increasing number of craft brewers in this category who distribute similar products that have similar pricing and target drinkers. The Company believes that its pricing is appropriate given the quality and reputation of its brands, while realizing that economic pricing pressures may affect future pricing levels. Large domestic and international brewers are able to compete more aggressively than the Company, as they have substantially greater resources, marketing strength and distribution networks than the Company. The Company anticipates competition among domestic craft brewers will remain strong, as the number of craft brewers continues to grow. The Company also increasingly competes with wine and spirits companies, some of which have significantly greater resources than the Company. This competitive environment may affect the Company’s overall performance within the High End category. As the market matures and the High End category continues to consolidate, the Company believes that companies that are well-positioned in terms of brand equity, marketing and distribution will have greater success than those who do not. With its over 400 Distributors nationwide and the Company’s sales force of approximately 520 people, as well as a commitment to maintaining its innovation capability, brand equity and quality, the Company believes it is well positioned to compete in the High End Beer category.