Boston Beer(US:SAM)2022-02-22 21:20Part I Business The Boston Beer Company sells alcoholic beverages, including hard seltzer, malt beverages, and hard cider, primarily in the U.S., operating through company-owned breweries and contract arrangements, focusing on 'High End' and 'Beyond Beer' categories with key brands like Truly Hard Seltzer and Samuel Adams - The company operates under multiple trade names, including The Boston Beer Company®, Twisted Tea Brewing Company®, and Truly Hard Seltzer Beverage Company, producing beverages at four primary company-owned breweries and under contract arrangements - The company's business goal is to lead the 'High End' and 'Beyond Beer' categories by offering high-quality, innovative alcohol beverages, supported by a large sales organization and world-class brewers - In 2021, the company entered into licensing agreements with PepsiCo, Jim Beam, and Patagonia to develop, market, and sell new alcoholic beverages, though these are expected to be less than 4% of net revenue in 2022 - The slowdown in the hard seltzer category growth from 158% growth in 2020 to 13% in 2021 significantly impacted the company's business, leading to inventory write-offs and reduced distributor orders in the second half of 2021 Industry Background - The 'High End' beer category, which includes hard seltzer, craft beers, and imports, grew approximately 2% in 2021, significantly outpacing the total beer category's 5% decline. The company holds an 11% market share in this category18 - The 'Beyond Beer' category (hard seltzer, FMBs, cider, etc.) grew approximately 14% in 2021 and now represents over 19% of the combined U.S. beer and Beyond Beer market. The company has a 26% market share in this category21 - The spirits Ready-to-Drink (RTD) market is an emerging category that the company entered in 2021. It is estimated to have grown 118% during 202122 Product Portfolio - Truly Hard Seltzer is a leading brand in the hard seltzer category, which grew 13% in 2021 after a 158% growth in 2020. The slowdown significantly impacted the company's 2021 business32 - Twisted Tea became the largest selling flavored malt beverage (FMB) brand in 2021. The FMB category grew approximately 3% in 20212534 - The craft beer category, where Samuel Adams and Dogfish Head compete, declined by approximately 6% in 202136 - Angry Orchard is the largest selling hard cider in the U.S., but the hard cider category declined by 8% in 20212542 Production Strategy - The company's production at its own breweries decreased from 65% of volume in 2020 to 56% in 2021. Capital investments in 2021 were approximately $147.9 million, with $140-$190 million planned for 202271 - Due to lower than anticipated demand for Truly, the company terminated some third-party production contracts, incurring $19.6 million in termination costs and writing off $9.5 million in prepayments75 Expected Shortfall Fees at Third-Party Facilities | Year | Expected Shortfall Fees (in millions) | | :--- | :--- | | 2022 | $6 | | 2023 | $15 | | 2024 | $11 | | 2025 | $6 | | 2026 | $0 | | Thereafter | $0 | | Total | $38 | Human Capital Resources - As of December 25, 2021, the company had 2,543 employees, with 132 represented by unions101 - The company has implemented numerous Diversity, Equity, and Inclusion (DEI) initiatives since 2019, including creating a full-time DEI Leader position, establishing Coworker Resource Groups, and undergoing a pay equity analysis108114 - The 'Samuel Adams Brewing the American Dream' program, in partnership with Accion Opportunity Fund, has loaned over $74 million to nearly 3,500 small business owners since 2008, helping to create or maintain over 9,000 jobs111 Risk Factors The company identifies several material risks, with the COVID-19 pandemic continuing to pose threats to operations, supply chains, and demand, alongside industry competition, shifts in consumer tastes, and business-specific challenges like managing product portfolio expansion and dependence on key suppliers - The 2021 slowdown in hard seltzer market growth from 158% in 2020 to 13% greatly impacted the company's production and shipments, leading to $102.9 million in direct supply chain costs, including inventory destruction and contract termination fees135 - The company faces increasing competition from large non-alcoholic beverage companies like Pepsi, Coca-Cola, and Monster entering the alcohol market through licensing agreements or acquisitions126 - The company is dependent on its network of over 400 independent distributors, and changes in control or ownership within this network could lead to less support for its products131132 - The company's reliance on its own breweries (56% of 2021 volume) exposes it to capacity constraints, while its use of third-party brewers (like City Brewing, which produced 32% of 2021 volume) creates logistical costs and potential service-level risks146147 - The holder of 100% of the Class B Common Stock, C. James Koch, is able to exercise substantial influence over all matters requiring stockholder approval, which could delay or prevent a change in control172 Properties The company owns several major properties, including approximately 76 acres for its Pennsylvania Brewery, 57 acres for its Milton Brewery, and 10 acres for its Cincinnati Brewery, also leasing its principal corporate offices in Boston and various tap room and brewery spaces - The company owns its three largest production breweries, located in Breinigsville, PA (approx. 1 million sq. ft.), Milton, DE (approx. 240,000 sq. ft.), and Cincinnati, OH (approx. 128,500 sq. ft.)178179180 - The company leases its principal corporate offices in Boston, MA, with a term expiring in 2031, as well as numerous tap rooms and smaller breweries in key urban markets178182184185 Legal Proceedings The company is facing two notable legal proceedings: a consolidated securities class action lawsuit alleging misleading statements about business prospects, and a proposed class action lawsuit for false advertising regarding Truly product ingredients, both of which the company intends to vigorously defend against - A consolidated securities class action lawsuit was filed against the company and three officers, alleging misleading statements about business operations and prospects between April 22, 2021, and September 8, 2021191 - A proposed class action lawsuit filed in August 2021 alleges false advertising and other claims, stating that Truly products were misleadingly labeled regarding their ingredients192 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on the NYSE under SAM, experiencing significant volatility with a 168% return in 2020 followed by a 48% decline in 2021, while Class B shares, held by Chairman C. James Koch, retain full voting rights, and the company has a $931.0 million stock repurchase program with $90.3 million remaining Annual Stock Return Percentage | Company/Index | 2020 | 2021 | % Change | | :--- | :--- | :--- | :--- | | The Boston Beer Company, Inc. | 167.97% | (48.29)% | | S&P 500 Index | 16.40% | 29.44% | | S&P 500 Beverages Index | 6.56% | 14.51% | - The company has a dual-class stock structure. Class A shares have no voting rights, while Class B shares, held entirely by Chairman C. James Koch, have full voting rights198199200 - As of December 25, 2021, the company has approximately $90.3 million remaining under its $931.0 million stock repurchase authorization. No shares were repurchased under the program in 2021202203235 Management's Discussion and Analysis of Financial Condition and Results of Operations The company's 2021 financial performance was heavily impacted by the hard seltzer market slowdown, with net revenue growing 18.5% to $2.06 billion but operating income plummeting 96.7% to $8.0 million due to $102.9 million in direct costs and $93.5 million in indirect costs, resulting in a gross margin decline from 46.9% to 38.8%, though liquidity remains solid - The slowdown in the hard seltzer market resulted in $102.9 million of direct costs, including $59.5 million for inventory obsolescence, $30.7 million in contract termination fees, and $12.7 million in asset impairments208209210211 - Depletions (distributor sales to retailers) increased by approximately 22% in 2021, driven by Truly Hard Seltzer, Twisted Tea, Samuel Adams, and Dogfish Head brands217 Fiscal Year 2021 vs. 2020 Financial Results (in thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Revenue | $2,057,622 | $1,736,432 | 18.5% | | Gross Profit | $797,792 | $814,452 | (2.0)% | | Operating Income | $7,997 | $244,207 | (96.7)% | | Net Income | $14,553 | $191,960 | (92.4)% | Liquidity and Capital Resources - Cash and cash equivalents decreased from $163.3 million at year-end 2020 to $66.3 million at year-end 2021231 - Cash provided by operating activities fell sharply to $56.3 million in 2021 from $253.4 million in 2020, mainly due to lower net income and an increase in income tax receivables233 - The company has a $150.0 million revolving credit facility expiring in March 2023. As of the filing date, $20.0 million had been drawn under the facility236 Critical Accounting Policies - Provision for excess or expired inventory was a significant estimate, increasing to $62.6 million in 2021 from $11.3 million in 2020, driven by the hard seltzer slowdown240 - The company performs annual impairment testing for its goodwill and indefinite-lived intangible assets, such as the Dogfish Head trademark. The 2021 test indicated no impairment, but the fair value of the Dogfish Head trademark was only 120.7% of its carrying value, indicating sensitivity to changes in revenue growth or discount rates244246 - Revenue recognition involves key estimates for stale beer returns. The stale beer reserve increased to $6.0 million at year-end 2021 from $3.1 million in 2020250 Financial Statements and Supplementary Data This section includes Deloitte & Touche LLP's unqualified opinion on the financial statements and internal controls, highlighting the valuation of the Dogfish Head brand name intangible asset and the reserve for excess or expired inventory as critical audit matters, and provides consolidated financial statements and detailed notes - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the company's internal control over financial reporting268269 - Critical Audit Matters identified were the valuation of the Dogfish Head brand name intangible asset and the reserve for excess or expired inventory, due to the significant judgments and assumptions required by management273275 Notes to Consolidated Financial Statements - Note C details the financial impact of the hard seltzer market slowdown, including $59.5 million in inventory-related costs, $14.8 million in contract termination costs, a $9.5 million write-off of production prepayments, and a $12.7 million impairment of capital projects340342343 - Note E shows that inventory obsolescence reserves increased significantly to $43.1 million as of Dec 25, 2021, from $6.3 million as of Dec 26, 2020, primarily due to excess hard seltzer inventory346 - Note J discloses that at current projections, the company anticipates incurring approximately $38 million in shortfall fees under its third-party production contracts between 2022 and 2025360 - Note U outlines new perpetual licensing agreements with Jim Beam (for Sauza FMBs and Truly spirits) and PepsiCo (for Hard MTN DEW), both expected to launch in early 2022427428429 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 25, 2021, an assessment affirmed by Deloitte & Touche LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2021434 - Based on the COSO 2013 framework, management assessed the company's internal control over financial reporting as effective as of December 25, 2021436 Part III Directors, Executive Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Related Transactions, and Principal Accounting Fees, is incorporated by reference from the company's definitive Proxy Statement for its 2022 Annual Meeting - Information regarding directors, executive compensation, security ownership, related party transactions, and principal accounting fees is incorporated by reference from the registrant's definitive Proxy Statement for the 2022 Annual Meeting450451452454455 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including consolidated financial statements, notes, various agreements, equity plans, executive contracts, and required CEO and CFO certifications - This section provides a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements and required certifications456458