NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
National Beverage Corp. innovatively develops, produces, markets and sells a diverse 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 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 27, 2019. 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.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market. Inventories at July 27, 2019 were comprised of finished goods of $49.0 million and raw materials of $24.4 million. Inventories at April 27, 2019 were comprised of finished goods of $48.7 million and raw materials of $22.0 million.
8
Recently Adopted Accounting Pronouncements
As of April 28, 2019, the Company adopted ASU 2016-02 "Leases" which superceded the prior lease accounting guidance in its entirety. See note 6.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
(In thousands)
|
|
|
|
July 27,
2019
|
|
|
April 27,
2019
|
|
Land
|
|
$
|
9,835
|
|
|
$
|
9,835
|
|
Buildings and improvements
|
|
|
58,290
|
|
|
|
58,291
|
|
Machinery and equipment
|
|
|
226,115
|
|
|
|
222,243
|
|
Total
|
|
|
294,240
|
|
|
|
290,369
|
|
Less accumulated depreciation
|
|
|
(182,602
|
)
|
|
|
(179,053
|
)
|
Property, plant and equipment – net
|
|
$
|
111,638
|
|
|
$
|
111,316
|
|
Depreciation expense was $3.8 million for the three months ended July 27, 2019 and $3.4 million for the three months ended July 28, 2018.
3. DEBT
At July 27, 2019, 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 July 27, 2019 or April 27, 2019. At July 27, 2019, $3.2 million of the Credit Facilities was reserved for standby letters of credit and $96.8 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 July 27, 2019, we were in compliance with all loan covenants.
4. STOCK-BASED COMPENSATION
During the three months ended July 27, 2019, options to purchase 400 shares were exercised (weighted average exercise price of $17.59 per share). At July 27, 2019, options to purchase 322,045 shares (weighted average exercise price of $11.13 per share) were outstanding and stock-based awards to purchase 2,811,613 shares of common stock were available for grant.
9
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 months ended July 27, 2019 and July 28, 2018:
|
|
(In thousands)
|
|
|
|
2019
|
|
|
2018
|
|
Recognized in AOCI:
|
|
|
|
|
|
|
|
|
(Loss) gain before income taxes
|
|
$
|
(1,423
|
)
|
|
$
|
6,347
|
|
Less income tax (benefit) provision
|
|
|
(340
|
)
|
|
|
1,518
|
|
Net
|
|
|
(1,083
|
)
|
|
|
4,829
|
|
Reclassified from AOCI to cost of sales:
|
|
|
|
|
|
|
|
|
(Loss) gain before income taxes
|
|
|
(1,444
|
)
|
|
|
8,934
|
|
Less income tax (benefit) provision
|
|
|
(345
|
)
|
|
|
2,064
|
|
Net
|
|
|
(1,099
|
)
|
|
|
6,870
|
|
Net change to AOCI
|
|
$
|
16
|
|
|
$
|
(2,041
|
)
|
As of July 27, 2019, the notional amount of our outstanding aluminum swap contracts was $35.7 million and, assuming no change in commodity prices, $2.0 million of unrealized losses before tax will be reclassified from AOCI and recognized in earnings over the next 12 months. See Note 1.
As of July 27, 2019, the fair value of the derivative liability was $2.0 million, which was included in accrued liabilities. At April 27, 2019, the fair value of the derivative liability was $2.0 million, 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. LEASES
The Company leases two manufacturing facilities, warehouse and office space ("real estate"), and machinery and other equipment, including delivery vehicles, under non-cancelable operating lease agreements. The leases expire at various dates through 2027.
In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-02, "Leases" (the "lease standard"). The lease standard requires lessees to recognize a right-to-use asset and a lease liability for virtually all leases (other than leases meeting the definition of a short-term lease). The new guidance is effective for fiscal years after December 15, 2018 and interim periods beginning the following fiscal year. The Company adopted the new lease standard as of April 28,2019 using the modified retrospective method and has elected to adopt the available practical expedients as accounting policy on initial adoption of the lease standard.
Upon adoption of the lease standard on April 28, 2019, the Company recorded a right-of-use asset for operating leases and lease liabilities of $55.5 million. The adoption of the lease standard did not change previously reported consolidated statements of income, did not result in cumulative effect adjustment to retained earnings in the period of adoption and did not impact cash flows.
The Company has used the following policies and assumptions in evaluating its population of leases:
|
●
|
Determining a lease - The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company's right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of the lease payments over the defined lease term.
|
|
●
|
Allocating lease and non-lease components - The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has certain equipment and vehicle lease agreements which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are generally accounted for separately where applicable.
|
|
●
|
Discount rate - The Company calculates the discount rate based on the Company's incremental borrowing rate using the contractual lease term.
|
10
|
●
|
Lease term - The Company does not recognize leases with a contractual term of less than 12 months on the balance sheet. Lease expense for these short- term leases is expensed on a straight-line basis over the lease term.
|
|
●
|
Rent increases or escalation clauses - Certain leases contain scheduled rent increases or escalation clauses. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the individual agreement.
|
|
●
|
Renewal options and / or purchase options - Certain leases include renewal options to extend the lease term and / or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company's leases do not include renewal periods or purchase options in the measurement of the right-of-use asset and the associated lease liability.
|
|
●
|
Option to terminate - Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed upon financial consideration. The terms and conditions of the termination options vary by contract.
|
The Company's weighted average remaining lease term was 4.2 years and weighted average discount rate was 3.38% as of July 27, 2019. The following is a summary of future minimum lease payments for all non-cancelable operating leases as of July 27, 2019:
|
|
(In thousands)
|
|
Remainder of Fiscal 2020
|
|
$
|
10,397
|
|
Fiscal 2021
|
|
|
21,717
|
|
Fiscal 2022
|
|
|
9,894
|
|
Fiscal 2023
|
|
|
7,741
|
|
Fiscal 2024
|
|
|
4,752
|
|
Thereafter
|
|
|
1,703
|
|
Total minimum lease payments including interest
|
|
|
56,204
|
|
Less: Amounts representing interest
|
|
|
(3,775
|
)
|
Present value of minimum lease payments
|
|
|
52,429
|
|
Less: Current portion of lease liabilities
|
|
|
(8,874
|
)
|
Non-current portion of lease liabilities
|
|
$
|
43,555
|
|
Lease expense for the three months ended July 27, 2019 was $3.4 million for operating leases and $.3 million for short-term leases. The impact on cash flows from operating leases was $3.7 million for the three months ended July 27, 2019.
Our minimum lease payments under non-cancelable operating leases as of April 27, 2019 were as follows:
|
|
(In thousands)
|
|
Fiscal 2020
|
|
$
|
16,105
|
|
Fiscal 2021
|
|
|
12,084
|
|
Fiscal 2022
|
|
|
9,894
|
|
Fiscal 2023
|
|
|
7,741
|
|
Fiscal 2024
|
|
|
4,510
|
|
Thereafter
|
|
|
1,703
|
|
Total minimum lease payments including interest
|
|
$
|
52,037
|
|
11