NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
National Beverage Corp. develops, produces, markets and sells a distinctive portfolio of Sparkling Waters, Juices, Energy Drinks and Carbonated Soft Drinks primarily in North America. Incorporated in Delaware in 1985, National Beverage Corp. is a holding company for various operating subsidiaries. When used in this report, the terms “we,” “us,” “our,” “Company” and “National Beverage” mean National Beverage Corp. and its subsidiaries.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of National Beverage Corp. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated.
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all information and notes presented in the annual consolidated financial statements. The consolidated financial statements should be read in conjunction with the annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016. The accounting policies used in these interim consolidated financial statements are consistent with those used in the annual consolidated financial statements.
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Results for the interim periods presented are not necessarily indicative of results which might be expected for the entire fiscal year.
Derivative Financial Instruments
We use derivative financial instruments to partially mitigate our exposure to changes in raw material costs. All derivative financial instruments are recorded at fair value in our Consolidated Balance Sheets. The estimated fair value of derivative financial instruments is calculated based on market rates to settle the instruments. We do not use derivative financial instruments for trading or speculative purposes. Credit risk related to derivative financial instruments is managed by requiring high credit standards for counterparties and frequent cash settlements. See Note 5.
Earnings Per Common Share
Basic earnings per common share is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated in a similar manner, but includes the dilutive effect of stock options.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market. Inventories at July 30, 2016 are comprised of finished goods of $31.4 million
and raw materials of $20.4 million. Inventories at April 30, 2016 are comprised of finished goods of $29.1 million and raw materials of $18.8 million.
2
. PROPERTY, PLANT AND EQUIPMENT
Property consists of the following:
|
|
(In thousands)
|
|
|
|
July 30,
2016
|
|
|
April 30,
2016
|
|
Land
|
|
$
|
9,500
|
|
|
$
|
9,500
|
|
Buildings and improvements
|
|
|
50,881
|
|
|
|
50,856
|
|
Machinery and equipment
|
|
|
165,414
|
|
|
|
162,195
|
|
Total
|
|
|
225,795
|
|
|
|
222,551
|
|
Less accumulated depreciation
|
|
|
(163,069
|
)
|
|
|
(160,619
|
)
|
Property, plant and equipment – net
|
|
$
|
62,726
|
|
|
$
|
61,932
|
|
Depreciation expense was $2.7 million for the three months ended July 30, 2016 and $2.6 million for the three months ended August 1, 2015.
3
. DEBT
At July 30, 2016, a subsidiary of the Company maintained unsecured revolving credit facilities with banks aggregating $100 million (the “Credit Facilities”). The Credit Facilities expire from October 10, 2017 to June 18, 2018 and, currently, any borrowings would bear interest at .9% above one-month LIBOR. There were no borrowings outstanding under the Credit Facilities at July 30, 2016 or at April 30, 2016. At July 30, 2016, $2.2 million of the Credit Facilities were reserved for standby letters of credit and $97.8 million were available for borrowings.
The Credit Facilities require the subsidiary to maintain certain financial ratios, including debt to net worth and debt to EBITDA (as defined in the Credit Facilities), and contain other restrictions, none of which are expected to have a material effect on our operations or financial position. At July 30, 2016, we were in compliance with all loan covenants.
4
. STOCK-BASED COMPENSATION
During the three months ended July 30, 2016, options to purchase 1,900 shares were exercised (weighted average exercise price of $15.29 per share). At July 30, 2016, options to purchase 416,995 shares (weighted average exercise price of $12.41 per share) were outstanding and stock-based awards to purchase 2,802,614 shares of common stock were available for grant.
5
. DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, we enter into aluminum swap contracts to partially mitigate our exposure to changes in the cost of aluminum cans. Such financial instruments are designated and accounted for as a cash flow hedge. Accordingly, gains or losses attributable to the effective portion of the cash flow hedge are reported in Accumulated Other Comprehensive Income (Loss) (“AOCI”) and reclassified into earnings through cost of sales in the period in which the hedged transaction affects earnings. The ineffective portion of the change in fair value of our cash flow hedge was immaterial. The following summarizes the gains (losses) recognized in the Consolidated Statements of Income and AOCI relative to cash flow hedges for the three months ended July 30, 2016 and August 1, 2015:
|
|
(In thousands)
|
|
|
|
2016
|
|
|
2015
|
|
Recognized in AOCI:
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(450
|
)
|
|
$
|
(4,970
|
)
|
Less income tax benefit
|
|
|
(167
|
)
|
|
|
(1,844
|
)
|
Net
|
|
|
(283
|
)
|
|
|
(3,126
|
)
|
Reclassified from AOCI to cost of sales:
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,110
|
)
|
|
|
(1,391
|
)
|
Less income tax benefit
|
|
|
(412
|
)
|
|
|
(516
|
)
|
Net
|
|
|
(698
|
)
|
|
|
(875
|
)
|
Net change to AOCI
|
|
$
|
415
|
|
|
$
|
(2,251
|
)
|
As of July 30, 2016, the notional amount of our outstanding aluminum swap contracts was $9.3 million and, assuming no change in the commodity prices, $1.8 million of unrealized loss before tax will be reclassified from AOCI and recognized in earnings over the next twelve months. See Note 1.
As of July 30, 2016 and April 30, 2016, the fair value of the derivative liability was $1.8 million and $2.5 million, respectively, which was included in accrued liabilities. Such valuation does not entail a significant amount of judgment and the inputs that are significant to the fair value measurement are Level 2 as defined by the fair value hierarchy as they are observable market based inputs or unobservable inputs that are corroborated by market data.
6
.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). This amendment addresses several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for our fiscal year beginning April 30, 2017. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for our fiscal year beginning April 28, 2019.
We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires companies to classify all deferred tax liabilities and assets as noncurrent on the balance sheet. ASU 2015-17 is effective for our fiscal year beginning April 30, 2017.
If implemented, our current deferred tax asset would be reclassified to noncurrent in the consolidated balance sheet
. ASU 2015-17 has not yet been adopted.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize revenue in an amount that reflects the consideration it expects to receive in exchange for goods or services. On August 12, 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year and is effective for our fiscal year beginning April 29, 2018.
We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
7
.
COMMITMENTS AND CONTINGENCIES
As of July 30, 2016, we guaranteed the residual value of certain leased equipment in the amount of $4.1 million. If the proceeds from the sale of such equipment are less than the balance required by the lease when the lease terminates on August 1, 2017, the Company will be required to pay the difference up to such guaranteed amount. The Company expects to have no loss on such guarantee.