NOTES TO CONDENSED 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 the United States and Canada. 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 AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
Basis of Presentation
The condensed consolidated financial statements include the accounts of National Beverage Corp. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated.
The condensed 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 condensed 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 May 2, 2020. The accounting policies used in these interim condensed 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 condensed 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.
Reclassification
Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market. Inventories at August 1, 2020 were comprised of finished goods of $33.9 million and raw materials of $29.2 million. Inventories at May 2, 2020 were comprised of finished goods of $39.1 million and raw materials of $24.4 million.
Marketing Costs
The Company utilizes a variety of marketing programs, including cooperative advertising programs with customers, to advertise and promote our products to consumers. Marketing costs are expensed when incurred, except for prepaid advertising and production costs which are expensed when the advertising takes place. Marketing costs, which are included in selling, general and administrative expenses, totaled $9.9 million for the three months ended August 1, 2020 and $15.1 for the three months ended July 27, 2019.
Shipping and Handling Costs
Shipping and handling costs are reported in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. Such costs totaled $19.4 million for the three months ended August 1, 2020 and $18.0 for the three months ended July 27, 2019. Although our classification is consistent with many beverage companies, our gross margin may not be comparable to companies that include shipping and handling costs in cost of sales.
Summary of Significant Accounting Policies
There have been no significant changes in the Company's significant accounting policies during the three months ended August 1, 2020, as compared to the significant accounting policies described in the Form 10-K.
Recent Accounting Pronouncement
On December 18, 2019, the Financial Accounting Standards Board issued Accounting Standards Update, “Simplifying the Accounting for Income Taxes” (ASU 2019-12). The new standard reduces the complexity pertaining to certain areas in accounting for income taxes. Key elements include, but are not limited to, the elimination of certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and changes in tax laws or rates, as well as clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company's first quarter of fiscal year 2022. The Company is in the process of evaluating the impact of the adoption of this new standard on its condensed consolidated financial statements.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
(In thousands)
|
|
|
|
August 1,
2020
|
|
|
|
May 2,
2020
|
|
Land
|
|
$
|
9,835
|
|
|
|
$
|
9,835
|
|
Buildings and improvements
|
|
|
60,358
|
|
|
|
|
59,618
|
|
Machinery and equipment
|
|
|
241,178
|
|
|
|
|
238,300
|
|
Total
|
|
|
311,371
|
|
|
|
|
307,753
|
|
Less accumulated depreciation
|
|
|
(190,821
|
)
|
|
|
|
(187,126
|
)
|
Property, plant and equipment – net
|
|
$
|
120,550
|
|
|
|
$
|
120,627
|
|
Depreciation expense was $3.7 million for the three months ended August 1, 2020 and $3.8 million for the three months ended July 27, 2019.
3. DEBT
At August 1, 2020, a subsidiary of the Company maintained unsecured revolving credit facilities with banks aggregating $100 million (the “Credit Facilities”). The Credit Facilities expire from October 3, 2020 to June 18, 2021 and any borrowings would currently bear interest at .9% above one-month LIBOR. There were no borrowings outstanding under the Credit Facilities at August 1, 2020 or May 2, 2020. At August 1, 2020, $3.4 million of the Credit Facilities was reserved for standby letters of credit and $96.6 million was 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 August 1, 2020, we were in compliance with all loan covenants.
4. STOCK-BASED COMPENSATION
During the three months ended August 1, 2020, options to purchase 14,000 shares were exercised (weighted average exercise price of $9.95 per share). At August 1, 2020, options to purchase 173,045 shares (weighted average exercise price of $14.71 per share) were outstanding and stock-based awards to purchase 2,798,252 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 cash flow hedges. Accordingly, gains or losses attributable to the effective portion of the cash flow hedges are reported in Accumulated Other Comprehensive Income (Loss) (“AOCI”) and reclassified into 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 hedges was immaterial. The following summarizes the gains (losses) recognized in the Condensed Consolidated Statements of Income and AOCI relative to the cash flow hedge for the three months ended August 1, 2020 and July 27, 2019:
|
|
(In thousands)
|
|
|
|
2020
|
|
|
2019
|
|
Recognized in AOCI:
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes
|
|
$
|
5,080
|
|
|
$
|
(1,423
|
)
|
Less income tax provision (benefit)
|
|
|
1,215
|
|
|
|
(340
|
)
|
Net
|
|
|
3,865
|
|
|
|
(1,083
|
)
|
Reclassified from AOCI to cost of sales:
|
|
|
|
|
|
|
|
|
(Loss) before income taxes
|
|
|
(1,832
|
)
|
|
|
(1,444
|
)
|
Less income tax (benefit)
|
|
|
(438
|
)
|
|
|
(345
|
)
|
Net
|
|
|
(1,394
|
)
|
|
|
(1,099
|
)
|
Net change to AOCI
|
|
$
|
5,259
|
|
|
$
|
16
|
|
As of August 1, 2020, the notional amount of our outstanding aluminum swap contracts was $37.1 million and, assuming no change in commodity prices, $130,000 of unrealized losses before tax will be reclassified from AOCI and recognized in earnings over the next 12 months.
As of August 1, 2020, the fair value of the derivative asset was $1.0 million, which was included as a component of prepaid and other assets and the fair value of the derivative liability was $987,000 which was included as a component of accrued liabilities. At May 2, 2020, the fair value of the derivative liability was $6.9 million, which was included as a component of 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. LEASES
The Company has entered into various non-cancelable operating lease agreements for certain of our offices, buildings, machinery and equipment expiring at various dates through January 2029. The Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Lease agreements generally do not contain material residual value guarantees or material restrictive covenants. Operating lease cost for the three months ended August 1, 2020 and July 27, 2019 was $3.4 million. As of August 1, 2020, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.1 years and 3.38%, respectively. As of May 2, 2020, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.3 years and 3.38%, respectively. Cash payments were $3.5 million and $3.7 million, respectively for operating leases for the three months ended August 1, 2020 and July 27, 2019.
The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases as of August 1, 2020:
|
|
(In thousands)
|
|
Fiscal 2021 - Remaining 3 quarters
|
|
$
|
10,725
|
|
Fiscal 2022
|
|
|
13,276
|
|
Fiscal 2023
|
|
|
8,975
|
|
Fiscal 2024
|
|
|
7,361
|
|
Fiscal 2025
|
|
|
4,475
|
|
Thereafter
|
|
|
4,101
|
|
Total minimum lease payments including interest
|
|
|
48,913
|
|
Less: Amounts representing interest
|
|
|
(2,897
|
)
|
Present value of minimum lease payments
|
|
|
46,016
|
|
Less: Current portion of lease liabilities
|
|
|
(16,481
|
)
|
Non-current portion of lease liabilities
|
|
$
|
29,535
|
|
The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases as of May 2, 2020:
|
|
(In thousands)
|
|
Fiscal 2021
|
|
$
|
14,206
|
|
Fiscal 2022
|
|
|
13,276
|
|
Fiscal 2023
|
|
|
8,975
|
|
Fiscal 2024
|
|
|
7,361
|
|
Fiscal 2025
|
|
|
4,475
|
|
Thereafter
|
|
|
4,101
|
|
Total minimum lease payments including interest
|
|
|
52,394
|
|
Less: Amounts representing interest
|
|
|
(3,255
|
)
|
Present value of minimum lease payments
|
|
|
49,139
|
|
Less: Current portion of lease liabilities
|
|
|
(16,980
|
)
|
Non-current portion of lease liabilities
|
|
$
|
32,159
|
|