Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of the Company for the thirteen and thirty-nine week period ended September 24, 2022, as compared to the thirteen and thirty-nine week period ended September 25, 2021. This discussion should be read in conjunction with the Management’s
18
Table of Contents
Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.
RESULTS OF OPERATIONS
Thirteen Weeks Ended September 24, 2022 compared to Thirteen Weeks Ended September 25, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended (in thousands, except per barrel) |
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2022 |
|
|
September 25, 2021 |
|
|
Amount change |
|
|
% change |
|
|
Per barrel change |
|
Barrels sold |
|
|
|
|
|
2,345 |
|
|
|
|
|
|
|
|
|
2,312 |
|
|
|
|
|
|
33 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
Per barrel |
|
|
% of net revenue |
|
|
|
|
|
Per barrel |
|
|
% of net revenue |
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
596,453 |
|
|
$ |
254.38 |
|
|
|
100.0 |
% |
|
$ |
561,643 |
|
|
$ |
242.93 |
|
|
|
100.0 |
% |
|
$ |
34,810 |
|
|
|
6.2 |
% |
|
$ |
11.45 |
|
Cost of goods |
|
|
338,707 |
|
|
|
144.45 |
|
|
|
56.8 |
% |
|
|
388,947 |
|
|
|
168.23 |
|
|
|
69.3 |
% |
|
|
(50,240 |
) |
|
|
(12.9 |
)% |
|
|
(23.78 |
) |
Gross profit |
|
|
257,746 |
|
|
|
109.93 |
|
|
|
43.2 |
% |
|
|
172,696 |
|
|
|
74.70 |
|
|
|
30.7 |
% |
|
|
85,050 |
|
|
|
49.2 |
% |
|
|
35.23 |
|
Advertising, promotional and selling expenses |
|
|
153,717 |
|
|
|
65.56 |
|
|
|
25.8 |
% |
|
|
166,817 |
|
|
|
72.15 |
|
|
|
29.7 |
% |
|
|
(13,100 |
) |
|
|
(7.9 |
)% |
|
|
(6.59 |
) |
General and administrative expenses |
|
|
37,382 |
|
|
|
15.94 |
|
|
|
6.3 |
% |
|
|
32,066 |
|
|
|
13.87 |
|
|
|
5.7 |
% |
|
|
5,316 |
|
|
|
16.6 |
% |
|
|
2.07 |
|
Contract termination costs and other |
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
|
|
35,428 |
|
|
|
15.32 |
|
|
|
0.0 |
% |
|
|
(35,428 |
) |
|
|
100.0 |
% |
|
|
(15.32 |
) |
Impairment of intangible assets |
|
|
27,100 |
|
|
|
11.56 |
|
|
|
4.5 |
% |
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
|
|
27,100 |
|
|
|
100.0 |
% |
|
|
11.56 |
|
Impairment of brewery assets |
|
|
1,181 |
|
|
|
0.50 |
|
|
|
0.2 |
% |
|
|
14,158 |
|
|
|
6.12 |
|
|
|
2.5 |
% |
|
|
(12,977 |
) |
|
|
(91.7 |
)% |
|
|
(5.62 |
) |
Total operating expenses |
|
|
219,380 |
|
|
|
93.56 |
|
|
|
36.8 |
% |
|
|
248,469 |
|
|
|
107.47 |
|
|
|
44.2 |
% |
|
|
(29,089 |
) |
|
|
(11.7 |
)% |
|
|
(13.90 |
) |
Operating income (loss) |
|
|
38,366 |
|
|
|
16.37 |
|
|
|
6.4 |
% |
|
|
(75,773 |
) |
|
|
(32.77 |
) |
|
|
(13.5 |
)% |
|
|
114,139 |
|
|
|
(150.6 |
)% |
|
|
49.13 |
|
Other expense, net |
|
|
(132 |
) |
|
|
(0.06 |
) |
|
|
(0.0 |
)% |
|
|
(683 |
) |
|
|
(0.30 |
) |
|
|
(0.1 |
)% |
|
|
551 |
|
|
|
(80.7 |
)% |
|
|
0.24 |
|
Income before income tax provision (benefit) |
|
|
38,234 |
|
|
|
16.31 |
|
|
|
6.4 |
% |
|
|
(76,456 |
) |
|
|
(33.07 |
) |
|
|
(13.6 |
)% |
|
|
114,690 |
|
|
|
(150.0 |
)% |
|
|
49.37 |
|
Income tax provision (benefit) |
|
|
10,948 |
|
|
|
4.67 |
|
|
|
1.8 |
% |
|
|
(18,035 |
) |
|
|
(7.80 |
) |
|
|
(3.2 |
)% |
|
|
28,983 |
|
|
|
(160.7 |
)% |
|
|
12.47 |
|
Net income (loss) |
|
|
27,286 |
|
|
|
11.64 |
|
|
|
4.6 |
% |
|
|
(58,421 |
) |
|
|
(25.27 |
) |
|
|
(10.4 |
)% |
|
|
85,707 |
|
|
|
(146.7 |
)% |
|
|
36.90 |
|
Introduction. The Company recognized $133.0 million in direct and indirect costs in the third quarter of 2021 resulting from the 2021 slowdown in hard seltzer category growth which impacts comparisons between the third quarter of 2022 and the third quarter of 2021. These costs incurred in the third quarter of 2021 included inventory obsolescence, destruction costs and other inventory related costs of $54.3 million, contract termination costs, primarily for excess third-party contract production, of $35.4 million, equipment impairments of $12.7 million, increased materials sourcing and warehousing costs of $11.8 million, unfavorable absorption impacts at Company-owned breweries and downtime charges at third party breweries of $11.4 million, and customer return provisions for out of code or damaged products of $5.4 million and other costs of $2.0 million. The total direct and indirect costs of $133.0 million were recorded in the third quarter 2021 financial statements as a $6.9 million reduction in net revenue, $78.0 million increase in cost of goods sold, $35.4 million in contract termination fees, and $12.7 million in impairments of brewery assets.
Net revenue. Net revenue increased by $34.8 million, or 6.2%, to $596.5 million for the thirteen weeks ended September 24, 2022, as compared to $561.6 million for the thirteen weeks ended September 25, 2021, primarily as a result of price increases of $25.7 million and higher shipment volume of $8.4 million, partially offset by higher returns of $4.0 million.
Volume. Total shipment volume increased by 1.4% to 2,345,000 barrels for the thirteen weeks ended September 24, 2022, as compared to 2,312,000 barrels for the thirteen weeks ended September 25, 2021, reflecting increases in the Company’s Twisted Tea, Hard Mountain Dew and Samuel Adams brands, partially offset by decreases in its Truly Hard Seltzer, Angry Orchard and Dogfish Head brands.
Depletions, or sales by distributors to retailers, of the Company’s products for the thirteen weeks ended September 24, 2022 decreased by approximately 6% compared to the thirteen weeks ended September 25, 2021, 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.
The Company believes distributor inventory as of September 24, 2022 averaged approximately five weeks on hand and was at an appropriate level for each of its brands. The Company expects distributors will keep inventory levels for the remainder of the year between four to five weeks on hand.
Net Revenue Per Barrel. Net revenue per barrel increased by 4.71% to $254.38 per barrel for the thirteen weeks ended September 24, 2022, as compared to $242.93 per barrel for the comparable period in 2021, primarily due to price increases.
19
Table of Contents
Cost of goods sold. Cost of goods sold was $144.45 per barrel for the thirteen weeks ended September 24, 2022, as compared to $168.23 per barrel for the thirteen weeks ended September 25, 2021. The 2022 decrease in cost of goods sold of $23.78 per barrel was primarily due to the unfavorable impact of costs recorded in the third quarter of 2021 resulting from the 2021 slowdown of hard seltzer of $78.0 million, or $33.74 per barrel, partially offset by current year inflationary impacts which resulted in increased packaging, ingredient, and energy costs of $12.6 million, or $5.37 per barrel, and higher inventory obsolescence costs of $8.2 million, or $3.50 per barrel.
Inflationary impacts of $12.6 million consist primarily of increased costs of cans of $4.6 million, paperboard of $4.0 million, sweetener ingredients of $1.1 million, and utilities of $1.1 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 the third quarters of 2022 and 2021, the additional can costs related to use of this more expensive supplier were $0.4 million and $1.3 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 $109.93 per barrel for the thirteen weeks ended September 24, 2022, as compared to $74.70 per barrel for the thirteen weeks ended September 25, 2021. The increase was primarily due to prior year costs related to the 2021 hard seltzer slowdown, partially offset by higher inventory obsolescence costs and returns in the third quarter of 2022. The higher obsolescence costs in the third quarter of 2022 were primarily related to the recent Truly product reformulation and lower than expected shipments. Inflationary cost impacts, primarily due to the increased packaging, ingredient, and utilities costs discussed above, were offset by increased pricing with a neutral impact on gross margin.
The Company currently expects to continue to offset inflationary impacts through increased pricing for the remainder of the year. As the Company's estimates for inflation in 2023 continue to change in the current economic environment, it is not possible to predict or quantify potential longer term impacts at this time.
The Company includes freight charges related to the movement of finished goods from its manufacturing locations to distributor locations in its advertising, promotional and selling expense line item. As such, the Company’s gross margins may not be comparable to those of other entities that classify costs related to distribution differently.
Advertising, promotional and selling expenses. Advertising, promotional and selling expenses decreased by $13.1 million, or 7.9%, to $153.7 million for the thirteen weeks ended September 24, 2022, as compared to $166.8 million for the thirteen weeks ended September 25, 2021. The decrease was primarily due to a reduction in brand investments of $9.5 million, mainly driven by lower media costs, and decreased freight to distributors of $3.6 million, largely as a result of lower freight rates.
Advertising, promotional and selling expenses were 25.8% of net revenue, or $65.56 per barrel, for the thirteen weeks ended September 24, 2022, as compared to 29.7% of net revenue, or $72.15 per barrel, for the thirteen weeks ended September 25, 2021. This decrease per barrel is primarily due to advertising, promotional and selling expenses decreasing.
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 condensed consolidated statements of comprehensive operations as reductions to advertising, promotional and selling expenses. Historically, contributions from distributors for advertising and promotional activities have amounted to between 1% and 3% of net sales. The Company may adjust its promotional efforts in the distributors’ markets, if changes occur in these promotional contribution arrangements, depending on industry and market conditions.
General and administrative expenses. General and administrative expenses increased by $5.3 million, or 16.6%, to $37.4 million for the thirteen weeks ended September 24, 2022, as compared to $32.1 million for the thirteen weeks ended September 25, 2021. The increase was primarily due to increased salaries and benefits costs.
Contract termination costs and other. Contract termination costs decreased $35.4 million from the third quarter of 2021 as a result of the significant contract termination costs incurred in the prior year quarter related to the 2021 slowdown of the hard seltzer category.
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. The brand impairment determination was primarily based on the latest forecasts of brand performance. See further discussion in Note F to the Condensed Consolidated Financial Statements within Part I, Item 1 of this Form 10-Q and in Part I, Item 2. Management’s Discussion
20
Table of Contents
and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Policies and Estimates – Valuation of Goodwill and Indefinite Lived Intangible Assets”.
Impairment of brewery assets. Impairment of brewery assets decreased $13.0 million from the third quarter of 2021, primarily due to write-downs of equipment of $12.7 million recorded in the prior year quarter related to the 2021 slowdown of the hard seltzer category.
Income tax provision (benefit). During the thirteen weeks ended September 24, 2022, the Company’s effective tax rate was 28.6%, or a tax provision of $10.1 million, compared to an effective tax rate of 23.6%, or a tax benefit of $18.0 million, for the thirteen weeks ended September 25, 2021. The change in the effective tax rate is primarily due to pre-tax income in the thirteen weeks ended September 24, 2022 compared to a pre-tax loss in the prior year period with no corresponding changes in non-deductible expenses.
Thirty-nine Weeks Ended September 24, 2022 compared to Thirty-nine Weeks Ended September 25, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine Weeks Ended (in thousands, except per barrel) |
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2022 |
|
|
September 25, 2021 |
|
|
Amount change |
|
|
% change |
|
|
Per barrel change |
|
Barrels sold |
|
|
|
|
|
6,472 |
|
|
|
|
|
|
|
|
|
7,037 |
|
|
|
|
|
|
(565 |
) |
|
|
(8.0 |
)% |
|
|
|
|
|
|
|
|
Per barrel |
|
|
% of net revenue |
|
|
|
|
|
Per barrel |
|
|
% of net revenue |
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,642,809 |
|
|
$ |
253.84 |
|
|
|
100.0 |
% |
|
$ |
1,709,528 |
|
|
$ |
242.93 |
|
|
|
100.0 |
% |
|
$ |
(66,719 |
) |
|
|
(3.9 |
)% |
|
$ |
10.91 |
|
Cost of goods |
|
|
946,336 |
|
|
|
146.22 |
|
|
|
57.6 |
% |
|
|
1,011,513 |
|
|
|
143.74 |
|
|
|
59.2 |
% |
|
|
(65,177 |
) |
|
|
(6.4 |
)% |
|
|
2.48 |
|
Gross profit |
|
|
696,473 |
|
|
|
107.62 |
|
|
|
42.4 |
% |
|
|
698,015 |
|
|
|
99.19 |
|
|
|
40.8 |
% |
|
|
(1,542 |
) |
|
|
(0.2 |
)% |
|
|
8.43 |
|
Advertising, promotional and selling expenses |
|
|
439,215 |
|
|
|
67.87 |
|
|
|
26.7 |
% |
|
|
469,296 |
|
|
|
66.69 |
|
|
|
27.5 |
% |
|
|
(30,081 |
) |
|
|
(6.4 |
)% |
|
|
1.18 |
|
General and administrative expenses |
|
|
115,929 |
|
|
|
17.91 |
|
|
|
7.1 |
% |
|
|
96,973 |
|
|
|
13.78 |
|
|
|
5.7 |
% |
|
|
18,956 |
|
|
|
19.5 |
% |
|
|
4.13 |
|
Contract termination costs and other |
|
|
5,330 |
|
|
|
0.82 |
|
|
|
0.3 |
% |
|
|
35,428 |
|
|
|
5.03 |
|
|
|
0.0 |
% |
|
|
(30,098 |
) |
|
|
100.0 |
% |
|
|
(4.21 |
) |
Impairment of intangible assets |
|
|
27,100 |
|
|
|
4.19 |
|
|
|
1.6 |
% |
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
|
|
27,100 |
|
|
|
100.0 |
% |
|
|
4.19 |
|
Impairment of brewery assets |
|
|
1,302 |
|
|
|
0.20 |
|
|
|
0.1 |
% |
|
|
15,389 |
|
|
|
2.19 |
|
|
|
0.9 |
% |
|
|
(14,087 |
) |
|
|
(91.5 |
)% |
|
|
(1.99 |
) |
Total operating expenses |
|
|
588,876 |
|
|
|
90.99 |
|
|
|
35.8 |
% |
|
|
617,086 |
|
|
|
87.69 |
|
|
|
36.1 |
% |
|
|
(28,210 |
) |
|
|
(4.6 |
)% |
|
|
3.30 |
|
Operating income |
|
|
107,597 |
|
|
|
16.63 |
|
|
|
6.5 |
% |
|
|
80,929 |
|
|
|
11.50 |
|
|
|
4.7 |
% |
|
|
26,668 |
|
|
|
33.0 |
% |
|
|
5.13 |
|
Other expense, net |
|
|
(783 |
) |
|
|
(0.12 |
) |
|
|
(0.0 |
)% |
|
|
(739 |
) |
|
|
(0.11 |
) |
|
|
(0.0 |
)% |
|
|
(44 |
) |
|
|
6.0 |
% |
|
|
(0.01 |
) |
Income before income tax provision |
|
|
106,814 |
|
|
|
16.51 |
|
|
|
6.5 |
% |
|
|
80,190 |
|
|
|
11.40 |
|
|
|
4.7 |
% |
|
|
26,624 |
|
|
|
33.2 |
% |
|
|
5.12 |
|
Income tax provision |
|
|
28,134 |
|
|
|
4.35 |
|
|
|
1.7 |
% |
|
|
13,852 |
|
|
|
1.97 |
|
|
|
0.8 |
% |
|
|
14,282 |
|
|
|
103.1 |
% |
|
|
2.38 |
|
Net income |
|
|
78,680 |
|
|
|
12.16 |
|
|
|
4.8 |
% |
|
|
66,338 |
|
|
|
9.43 |
|
|
|
3.9 |
% |
|
|
12,342 |
|
|
|
18.6 |
% |
|
|
2.74 |
|
Introduction. The Company recognized $143.9 million in direct and indirect costs in the thirty-nine week period ended September 25, 2021 resulting from the 2021 slowdown in hard seltzer category growth which impacts comparisons between the respective thirty-nine week periods in 2022 and 2021. Those costs incurred during the thirty-nine week period ended September 25, 2021 included inventory obsolescence, destruction costs and other inventory related costs of $54.3 million, contract termination costs, primarily for excess third-party contract production, of $35.4 million, increased materials sourcing and warehousing costs of $22.3 million, equipment impairments of $12.7 million, unfavorable absorption impacts at Company-owned breweries and downtime charges at third party breweries of $11.8 million, and customer return provisions for out of code or damaged products of $5.4 million and other costs of $2.0 million. The total direct and indirect costs of $143.9 million were recorded in year-to-date 2021 financial statements as a $6.9 million reduction in net revenue, $88.9 million increase in cost of goods sold, $12.7 million in impairments of brewery assets and $35.4 million in contract termination fees.
Net revenue. Net revenue decreased by $66.7 million, or 3.9%, to $1,642.8 million for the thirty-nine weeks ended September 24, 2022, as compared to $1,709.5 million for the thirty-nine weeks ended September 25, 2021, primarily as a result of lower shipment volume of $143.4 million and higher returns of $12.6 million, partially offset by price increases of $83.2 million.
Volume. Total shipment volume decreased by 8.0% to 6,472,000 barrels for the thirty-nine weeks ended September 24, 2022, as compared to 7,037,000 barrels for the thirty-nine weeks ended September 25, 2021, 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.
Depletions year-to-date decreased 7% from year-to-date 2021, 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.
Net Revenue Per Barrel. Net revenue per barrel increased by 4.5% to $253.84 per barrel for the thirty-nine weeks ended September 24, 2022, as compared to $242.93 per barrel for the comparable period in 2021, primarily due to price increases.
21
Table of Contents
Cost of goods sold. Cost of goods sold was $146.22 per barrel for the thirty-nine weeks ended September 24, 2022, as compared to $143.74 per barrel for the thirty-nine weeks ended September 25, 2021. The 2022 increase in cost of goods sold of $2.48 per barrel was primarily due to current year inflationary impacts on packaging, ingredient, and energy costs of $41.7 million, or $6.44 per barrel, unfavorable changes in product mix of $14.5 million, or $2.24 per barrel, higher inventory obsolescence costs of $13.4 million, or $2.07 per barrel, higher per barrel processing costs at Company-owned breweries due to lower volumes of $10.1 million, or $1.56 per barrel, increased warehousing and pallet costs of $9.1 million, or $1.40 per barrel, partially offset by costs recorded in the third quarter of 2021 resulting from the 2021 slowdown of hard seltzer of $88.9 million, or $12.63 per barrel.
Inflationary impacts of $41.7 million consist primarily of increased costs of cans of $26.8 million, paperboard of $6.3 million, utilities of $2.5 million and sweetener ingredients of $1.9 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 the first nine months of 2022 and 2021, the additional can costs related to use of this more expensive supplier were $3.6 million 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 $107.62 per barrel for the thirty-nine weeks ended September 24, 2022, as compared to $99.19 per barrel for the thirty-nine weeks ended September 25, 2021. The increase was primarily due to costs in the prior year resulting from the 2021 slowdown of hard seltzer and increased pricing in the current year, partially offset by current year inflationary impacts primarily due to increased packaging, ingredient, and energy costs, higher inventory obsolescence costs, higher returns and unfavorable changes in product mix.
Advertising, promotional and selling expenses. Advertising, promotional and selling expenses decreased by $30.1 million, or 6.4%, to $439.3 million for the thirty-nine weeks ended September 24, 2022, as compared to $469.3 million for the thirty-nine weeks ended September 25, 2021. The decrease was primarily due to a reduction in brand investments of $30.1 million, mainly driven by lower media costs. Freight to distributors was flat as higher rates were offset by lower volumes.
Advertising, promotional and selling expenses were 26.7% of net revenue, or $67.87 per barrel, for the thirty-nine weeks ended September 24, 2022, as compared to 27.5% of net revenue, or $66.69 per barrel, for the thirty-nine weeks ended September 25, 2021. This increase per barrel is primarily due to advertising, promotional and selling expenses decreasing at a lower rate than shipments.
General and administrative expenses. General and administrative expenses increased by $18.9 million, or 19.5%, to $116 million for the thirty-nine weeks ended September 24, 2022, as compared to $97 million for the thirty-nine weeks ended September 25, 2021. The increase was primarily due to increased salaries and benefits costs.
Contract termination costs and other. Contract termination costs decreased $30.1 million from year-to-date 2021, primarily due to the higher contract termination costs incurred in the prior year related to the 2021 slowdown of the hard seltzer category.
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 F to the Condensed Consolidated Financial Statements within Part I, Item 1 of this Form 10-Q and in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Policies and Estimates – Valuation of Goodwill and Indefinite Lived Intangible Assets”.
Impairment of brewery assets. Impairment of brewery assets decreased $14.1 million from year-to-date 2021, primarily due to write-downs of equipment of $12.7 million in the third quarter of 2021 related to the 2021 slowdown of the hard seltzer category.
Income tax provision. During the thirty-nine weeks ended September 24, 2022, the Company’s effective tax rate was 26.3%, or a tax provision of $28.1 million, compared to an effective tax rate of 17.3%, or a tax provision of $13.9 million, for the thirteen weeks ended September 25, 2021. The change in the effective tax rate is primarily due to a decrease in excess tax benefits related to the Company’s stock-based compensation award activity.
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 increased to $222.1 million as of September 24, 2022 from $26.8 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 thirty-nine weeks ended September 24, 2022 was $225.0 million and primarily consisted of non-cash items of $108.0 million, net income of $78.7 million, and a net decrease in operating assets and liabilities of $38.3 million. The inventory increase of $45.2 million and corresponding increase in accounts payable of $67.6 million from December 25, 2021 levels are primarily seasonal in nature. The Company believes inventory levels are appropriate to support future demand projections. The accounts receivable increase of $37.7 million is due to increased shipments and higher product pricing during the thirteen weeks ended September 24, 2022 as compared to the thirteen weeks ended December 25, 2021. The prepaid expenses and other current assets decrease of $52.7 million is primarily driven by income tax refunds of $40.8 million received during the second quarter of 2022. Cash provided by operating activities for the thirty-nine weeks ended September 25, 2021 was $51.0 million and primarily consisted of non-cash items of $78.6 million and net income of $66.3 million, partially offset by a net increase in operating assets and liabilities of $94.0 million. The increase in cash provided by operating activities for the thirty-nine weeks ended September 24, 2022 compared to the prior period is primarily due to income tax refunds received, higher net income, and decreases in inventory and third party production prepayments.
The Company used $69.8 million in investing activities during the thirty-nine weeks ended September 24, 2022, as compared to $119.6 million during the thirty-nine weeks ended September 25, 2021. Investing activities primarily consisted of capital investments made mostly in the Company’s breweries to drive efficiencies and cost reductions and support product innovation and future growth.
Cash provided by financing activities was $0.6 million during the thirty-nine weeks ended September 24, 2022, as compared to $8.1 million used during the thirty-nine weeks ended September 25, 2021. The $8.7 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 thirty-nine weeks ended September 24, 2022 and the period from September 25, 2022 through October 15, 2022, the Company did not repurchase any shares of its Class A Common Stock. As of October 20, 2022, the Company had repurchased a cumulative total of approximately 13.8 million shares of its Class A Common Stock for an aggregate purchase price of $840.7 million and had approximately $90.3 million remaining on the $931.0 million stock repurchase expenditure limit set by the Board of Directors.
The Company expects that its cash balance as of September 24, 2022 of $222.1 million, along with future operating cash flows, will be sufficient to fund future cash requirements. The Company’s $150.0 million credit facility has a term scheduled to expire on March 31, 2023. The Company is currently in negotiations on an extension of the term on the credit facility and expects an agreement to be reached during the fourth quarter of 2022 or the first quarter of 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.
Critical Accounting Policies and Estimates
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.
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 Company’s current strategic operating plans which include reductions in revenues from the Dogfish Head beer products which were partially offset with
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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 loss for the asset. The recognition of any resulting impairment loss could have a material adverse impact on our 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 5.9% decrease to the current fair value of $71.4 million.
•A decrease in the discount rate of 1.5% would result in a 16.0% increase to the current fair value of $71.4 million and an increase in the discount rate of 1.5% would result in a 12.2% decrease to the current fair value of $71.4 million.
FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q and in other documents incorporated herein, as well as in oral statements made by the Company, statements that are prefaced with the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “designed” and similar expressions, are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company’s current expectations and estimates as to prospective events and circumstances about which the Company can give no firm assurance. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect subsequent events or circumstances. Forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include the factors set forth below in addition to the other information set forth in this Quarterly Report on Form 10-Q and in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 25, 2021.
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