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 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 29, 2017 were comprised of finished goods of $35.7 million
and raw materials of $21.6 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)
|
|
|
|
July 29,
2017
|
|
|
April 29,
2017
|
|
Land
|
|
$
|
9,500
|
|
|
$
|
9,500
|
|
Buildings and improvements
|
|
|
51,164
|
|
|
|
51,157
|
|
Machinery and equipment
|
|
|
175,778
|
|
|
|
172,257
|
|
Total
|
|
|
236,442
|
|
|
|
232,914
|
|
Less accumulated depreciation
|
|
|
(170,292
|
)
|
|
|
(167,764
|
)
|
Property, plant and equipment – net
|
|
$
|
66,150
|
|
|
$
|
65,150
|
|
Depreciation expense was $3.0 million for the three months ended July 29, 2017 and $2.7 million for the three months ended July 30, 2016.
3
.
DEBT
At July 29, 2017, 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 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 July 29, 2017 or April 29, 2017. At July 29, 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 July 29, 2017, we were in compliance with all loan covenants.
4
. STOCK-BASED COMPENSATION
During the three months ended July 29, 2017, options to purchase 500 shares were granted (weighted average exercise price of $29.61) and options to purchase 3,100 shares were exercised (weighted average exercise price of $14.77 per share). At July 29, 2017, options to purchase 380,995 shares (weighted average exercise price of $11.46 per share) were outstanding and stock-based awards to purchase 2,810,014 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 months ended July 29, 2017 and July 30, 2016:
|
|
(In thousands)
|
|
|
|
2017
|
|
|
2016
|
|
Recognized in AOCI:
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(967
|
)
|
|
$
|
(450
|
)
|
Less income tax benefit
|
|
|
(359
|
)
|
|
|
(167
|
)
|
Net
|
|
|
(608
|
)
|
|
|
(283
|
)
|
Reclassified from AOCI to cost of sales:
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes
|
|
|
31
|
|
|
|
(1,110
|
)
|
Less income tax provision (benefit)
|
|
|
11
|
|
|
|
(412
|
)
|
Net
|
|
|
20
|
|
|
|
(698
|
)
|
Net change to AOCI
|
|
$
|
(628
|
)
|
|
$
|
415
|
|
As of July 29, 2017, the notional amount of our outstanding aluminum swap contracts was $53.2 million and, assuming no change in the commodity prices, $1.4 million of unrealized loss before tax will be reclassified from AOCI and recognized in earnings over the next 12 months. See Note 1.
As of July 29, 2017, the fair value of the derivative asset, derivative liability and derivative long-term liability was $205,000, $1.6 million and $318,000, which was included in prepaid and other assets, accrued liabilities and other liabilities, 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 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. We adopted ASU 2016
-09 effective for our fiscal year beginning April 30, 2017. The primary impact of adoption was the recognition of $81,000 for the three months ended July 29, 2017 of excess tax benefits related to share-based payment awards in our provision for income taxes, rather than paid-in capital.
Also effective April 30, 2017, the Company retrospectively presented excess tax benefits as an operating activity, rather than a financing activity, in our consolidated statement of cash flows. As a result, we reduced our financing activities and increased our operating activities by $28,000 for the three months ended July 30, 2016. The Company has elected to continue recognition of stock compensation based on estimated forfeitures.
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. 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.
7
. COMMITMENTS AND CONTINGENCIES
As of July 29, 2017, we guaranteed the residual value of certain leased equipment in the amount of $2.0 million. On July 31, 2017 the lease term was extended for 24 months to August 1, 2019. If the proceeds from the sale of such equipment are less than the balance required by the lease when the lease terminates, 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.
The cash dividend is reported as a current liability in the accompanying Condensed Consolidated Balance Sheets.