NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
National Beverage Corp. develops, produces, markets and sells a diverse portfolio of flavored beverage products 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 29, 2017. Excluding the adoption of the recently issued accounting pronouncements disclosed in Note 6, 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
P
er Common Share
Basic e
arnings 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 October 28, 2017 were comprised of finished goods of $38.4 million
and raw materials of $21.3 million. Inventories at April 29, 2017 were comprised of finished goods of $35.0 million and raw materials of $18.4 million.
2
. PROPERTY
, PLANT AND EQUIPMENT
Property
, plant and equipment consist of the following:
|
|
(In thousands)
|
|
|
|
October 28,
2017
|
|
|
April 29,
2017
|
|
Land
|
|
$
|
9,500
|
|
|
$
|
9,500
|
|
Buildings and improvements
|
|
|
51,323
|
|
|
|
51,157
|
|
Machinery and equipment
|
|
|
181,073
|
|
|
|
172,257
|
|
Total
|
|
|
241,896
|
|
|
|
232,914
|
|
Less accumulated depreciation
|
|
|
(172,537
|
)
|
|
|
(167,764
|
)
|
Property
, plant and equipment – net
|
|
$
|
69,359
|
|
|
$
|
65,150
|
|
Depreciation expense was $
3.1 million and $6.1 million for the three and six months ended October 28, 2017, respectively, and $2.7 million and $5.4 million for the three and six months ended October 29, 2016, respectively.
3
.
DEBT
At
October 28, 2017, a subsidiary of the Company maintained unsecured revolving credit facilities with banks aggregating $100 million (the “Credit Facilities”). The Credit Facilities expire from June 18, 2018 to April 30, 2021 and any borrowings would currently bear interest at .9% above one-month LIBOR. There were no borrowings outstanding under the Credit Facilities at October 28, 2017 or April 29, 2017. At October 28, 2017, $2.2 million of the Credit Facilities was reserved for standby letters of credit and $97.8 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 October 28, 2017, we were in compliance with all loan covenants.
4
. STOCK-BASED COMPENSATION
During the
six months ended October 28, 2017, options to purchase 17,400 shares were exercised (weighted average exercise price of $16.18 per share) and options to purchase 900 shares were cancelled (weighted average exercise price of $17.59 per share). At October 28, 2017, options to purchase 365,795 shares (weighted average exercise price of $11.24 per share) were outstanding and stock-based awards to purchase 2,810,914 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 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 the cash flow hedge for the three and six months ended October 28, 2017 and October 29, 2016:
|
|
(In thousands)
|
|
|
|
Three Months
Ended
|
|
|
Six Months Ended
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Recognized in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes
|
|
$
|
5,523
|
|
|
$
|
253
|
|
|
$
|
4,556
|
|
|
$
|
(197
|
)
|
Less income tax
provision (benefit)
|
|
|
2,049
|
|
|
|
94
|
|
|
|
1,690
|
|
|
|
(73
|
)
|
Net
|
|
$
|
3,474
|
|
|
$
|
159
|
|
|
$
|
2,866
|
|
|
$
|
(124
|
)
|
Reclassified from AOCI to cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes
|
|
$
|
362
|
|
|
$
|
(1,083
|
)
|
|
$
|
393
|
|
|
$
|
(2,193
|
)
|
Less income tax provision (benefit)
|
|
|
135
|
|
|
|
(402
|
)
|
|
|
146
|
|
|
|
(814
|
)
|
Net
|
|
$
|
227
|
|
|
$
|
(681
|
)
|
|
$
|
247
|
|
|
$
|
(1,379
|
)
|
Net change to AOCI
|
|
$
|
3,247
|
|
|
$
|
840
|
|
|
$
|
2,619
|
|
|
$
|
1,255
|
|
As of
October 28, 2017, the notional amount of our outstanding aluminum swap contracts was $42.6 million and, assuming no change in the commodity prices, $3.1 million of unrealized gain before tax will be reclassified from AOCI and recognized in earnings over the next 12 months. See Note 1.
As of
October 28, 2017, the fair value of the derivative asset and derivative long-term asset was $3.1 million and $308,000, which was included in prepaid and other assets and other assets, respectively. At April 29, 2017, the fair value of the derivative asset, derivative liability and derivative long-term liability was $602,000, $848,000 and $476,000, which was included in prepaid and other assets, accrued liabilities and other liabilities, respectively. 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
.
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The updated guidance simplifies and changes how companies account for certain aspects of share-based payment awards to employees, including accounting for income taxes
and forfeitures, as well as classification of certain items in the statement of cash flows. The Company adopted ASU 2016-09 effective April 30, 2017 and elected to apply the cash flow guidance retrospectively; therefore, cash flow from operating activities increased and cash flow from financing activities decreased by $76,000 for the six months ended October 29, 2016. The Company also elected to continue to estimate the number of awards that are expected to vest using the forfeiture option. The adoption of ASU 2016-09 reduced the Company’s income tax expense by $480,000 and $561,000 for the three and six months ended October 28, 2017, respectively.
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. We adopted ASU 2015-17 effective for our fiscal year beginning April 30, 2017, electing to apply it retrospectively to all periods presented. As a result, $3.9 million of deferred taxes was reclassified from current to non-current on the consolidated balance sheet as of April 29, 2017
.
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; however, adoption is not expected to have a material impact on our financial position, results of operations or cash flows.
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
August 2017, the FASB issued Accounting Standards Update 2017-12, “Targeted Improvements to Accounting for Hedge Activities” (“ASU 2017-12”). This amendment simplifies the application of hedge accounting and enables companies to better portray the economics of risk management activities in their financial statements. ASU 2017-12 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.
7
. COMMITMENTS AND CONTINGENCIES
As of
October 28, 2017, we guaranteed the residual value of certain leased equipment in the amount of $1.7 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, 2019, the Company shall be required to pay the difference up to such guaranteed amount. The Company does not expect to incur a loss on such guarantee.
8
.
CASH DIVIDEND
On May 5, 2017, the Company declared a special cash dividend of $1.50 per share to shareholders of record on June 5, 2017. The cash dividend of $69.9 million
was paid on August 4, 2017.