THE BOSTON BEER COMPANY, INC. 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 inthe 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% ofthe 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 endedDecember 25, 2021 , increased approximately 22% from the comparable 52 week fiscal period in the prior year. During the year endedDecember 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 endedDecember 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 endedDecember 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. 31 -------------------------------------------------------------------------------- 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 endedDecember 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 endedDecember 25, 2021 for the above items contributed to the Company's decrease in operating income from the prior year. Results of Operations
Year Ended
Year Ended
(in thousands, except per barrel)
Dec. 25 Dec. 26 Amount Per barrel
2021 2020 change % change change
Barrels sold 8,504 7,368 1,135 15.4 %
% of net % of net
Per barrel revenue Per barrel revenue
Net revenue $ 2,057,622 $ 241.97 100.0 % $ 1,736,432 $ 235.67 100.0 % $ 321,190 18.5 % $ 6.31
Cost of goods 1,259,830 148.15 61.2 % 921,980 125.13 53.1 % 337,850 36.6 % 23.02
Gross profit 797,792 93.82 38.8 % 814,452 110.54 46.9 % (16,660 ) (2.0 )% (16.72 )
Advertising,
promotional and
selling
expenses 606,994 71.38 29.5 % 447,568 60.74 25.8 % 159,426 35.6 % 10.64
General and
administrative
expenses 133,624 15.71 6.5 % 118,211 16.04 6.8 % 15,413 13.0 % (0.33 )
Contract termination
costs and other 30,678 3.61 1.5 % - - 0.0 % 30,678 100.0 % 3.61
Impairment of assets 18,499 2.18 0.9 % 4,466 0.61 0.3 % 14,033 314.2 % 1.57
Total operating
expenses 789,795 92.88 38.4 % 570,245 77.39 32.8 % 219,550 38.5 % 15.49
Operating income 7,997 0.94 0.4 % 244,207 33.14 14.1 % (236,210 ) (96.7 )% (32.20 )
Other (expense)
income, net (1,088 ) (0.13 ) (0.1 )% 23 0.00 0.0 % (1,111 ) (4830.4 )% (0.13 )
Income before
provision for income
taxes 6,909 0.81 0.3 % 244,230 33.15 14.1 % (237,321 ) (97.2 )% (32.33 )
Income tax (benefit)
provision (7,644 ) (0.90 ) (0.4 )% 52,270 7.09 3.0 % (59,914 ) (114.6 )% (7.99 )
Net income $ 14,553 $ 1.71 0.7 % $ 191,960 $ 26.05 11.1 % $ (177,407 ) (92.4 )% $ (24.34 )
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
Volume. Total shipment volume of 8,504,000 barrels for the year endedDecember 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, TrulyHard Seltzer , Samuel Adams, Angry Orchard and Dogfish Head brands. 32 -------------------------------------------------------------------------------- Depletions, or sales by Distributors to retailers, of the Company's products for the year endedDecember 25, 2021 increased by approximately 22% compared to the prior year, primarily due to increases in depletions of the Company's TrulyHard 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 endedDecember 25, 2021 , as compared to$235.67 per barrel for the year endedDecember 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 endedDecember 25, 2021 , as compared to$125.13 per barrel for the year endedDecember 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 endedDecember 25, 2021 , as compared to$110.54 per barrel for the year endedDecember 26, 2020 . Gross margin was 38.8% for the year endedDecember 25, 2021 , as compared to 46.9% for the year endedDecember 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
Advertising, promotional and selling expenses were 29.5% of net revenue, or$71.38 per barrel, for the year endedDecember 25, 2021 , as compared to 25.8% of net revenue, or$60.74 per barrel, for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 33 --------------------------------------------------------------------------------
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 ofDecember 25, 2021 from$163.3 million as ofDecember 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 endedDecember 25, 2021 , the Company did not repurchase any shares of its Class A Common Stock under the stock repurchase program. As ofDecember 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 . FromDecember 26, 2021 throughFebruary 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 expireMarch 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 ofDecember 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 withU.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 34 --------------------------------------------------------------------------------
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, atDecember 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
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.
35
--------------------------------------------------------------------------------
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 ofDecember 25, 2021 andDecember 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 36 -------------------------------------------------------------------------------- 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 ofDecember 25, 2021 andDecember 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. 37 -------------------------------------------------------------------------------- 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 theJustice Department's Bureau of Alcohol, Tobacco, Firearms and Explosives enforce laws under theFederal 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 withinthe 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.
© Edgar Online, source
