Notes to Consolidated Financial Statements

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

Basis of Presentation

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.  The consolidated financial statements include the accounts of National Beverage Corp. and all subsidiaries.  All significant intercompany transactions and accounts have been eliminated.  Our fiscal year ends the Saturday closest to April 30 and, as a result, an additional week is added every five or six years.  The fiscal year ended May 2, 2020 (Fiscal 2020) consisted of 53 weeks.  The fiscal year ended April 27, 2019 (Fiscal 2019) and the fiscal year ended April 28, 2018 (Fiscal 2018) both consisted of 52 weeks.

Cash and Equivalents

Cash and equivalents are comprised of cash and highly liquid securities (consisting primarily of bank deposits and short-term government money-market investments).

Derivative Financial Instruments

Derivative financial instruments are used to partially mitigate our exposure to changes in certain raw material costs. All derivative financial instruments are recorded at fair value in our Consolidated Balance Sheets. Derivative financial instruments are not used 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.

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 amounting to 200,000 shares in Fiscal 2020, 284,000 shares in Fiscal 2019, and 323,000 shares in Fiscal 2018.

Fair Value of Financial Instruments

The estimated fair values of derivative financial instruments are calculated based on market rates to settle the instruments.  These values represent the estimated amounts we would receive upon sale, taking into consideration current market prices and credit worthiness. 

Impairment of Long-Lived Assets

All long-lived assets, excluding goodwill and intangible assets not subject to amortization, are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair value is generally measured by discounting future cash flows. Goodwill and intangible assets not subject to amortization are evaluated for impairment annually or sooner if management believes such assets may be impaired. An impairment loss is recognized if the carrying amount or, for goodwill, the carrying amount of its reporting unit, is greater than its fair value.

Income Taxes

The Company’s effective income tax rate is based on estimates of taxes which will ultimately be payable. Deferred taxes are recorded to give recognition to temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. Valuation allowances are established to reduce the carrying amounts of deferred tax assets when it is deemed, more likely than not, that the benefit of deferred tax assets will not be realized.

Insurance Programs

The Company maintains self-insured and deductible programs for certain liability, medical and workers’ compensation exposures.  Accordingly, the Company accrues for known claims and estimated incurred but not reported claims not otherwise covered by insurance based on actuarial assumptions and historical claims experience.  At May 2, 2020, and April 27, 2019, other liabilities included accruals of $5.5 million and $5.7 million, respectively, for estimated non-current risk retention exposures, of which $4.3 million was covered by insurance at both dates and included as a component of non-current other assets.

Intangible Assets

Intangible Assets as of May 2, 2020 and April 27, 2019 consisted of non-amortizable acquired trademarks.

Inventories

Inventories are stated at the lower of first-in, first-out cost or market. Adjustments, if required, to reduce the cost of inventory to market (net realizable value) are made for estimated excess, obsolete or impaired balances. Inventories at May 2, 2020 were comprised of finished goods of $39.1 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.

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 $54.8 million in Fiscal 2020, $55.3 million in Fiscal 2019 and $49.7 million in Fiscal 2018.

New Accounting Pronouncements – Adopted

In February 2016, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. Effective for Fiscal 2020, the Company adopted the amendments to Topic 815 which did not have a material impact on the Company’s consolidated financial statements.

Effective for Fiscal 2020, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after April 27, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under ASC 840, "Leases." Topic 840.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward historical lease classification, the assessment on whether a contract was or contains a lease, and the initial direct costs for any leases that existed prior to April 28, 2019. The Company also elected to combine our lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.

Under Topic 842, the Company determines if an arrangement is a lease at inception. Right of use assets (ROU) and lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most leases do not provide an implicit rate, the Company’s incremental borrowing rate is used, based on the information available at commencement date, in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. 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.  Lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs.  Variable lease costs are expensed as incurred.  Lease agreements generally do not contain residual value guarantees or restrictive covenants.  

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Additions, replacements and betterments are capitalized, while maintenance and repairs that do not extend the useful life of an asset are expensed as incurred. Depreciation is recorded using the straight-line method over estimated useful lives of 5 to 30 years for buildings and improvements and 3 to 15 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the improvement. When assets are retired or otherwise disposed, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized.

Revenue Recognition

Revenue is recognized upon delivery to our customers, based on written sales terms that do not allow a right of return except in rare instances.  Our products are typically sold on credit; however smaller direct store delivery accounts may be sold on a cash basis. Our credit terms normally require payment within 30 days of delivery and may allow discounts for early payment.  The Company estimates and reserves for bad debt exposure based on our experience with past due accounts, collectability and our analysis of customer data. 

Various sales incentive arrangements are offered to our customers that require customer performance or achievement of certain sales volume targets. Sales incentives are accrued over the period of benefit or expected sales. When the incentive is paid in advance, the aggregate incentive is recorded as a prepaid and amortized over the period of benefit. The recognition of these incentives involves the use of judgment related to performance and sales volume estimates that are made based on historical experience and other factors. Sales incentives are accounted for as a reduction of sales and actual amounts ultimately realized may vary from accrued amounts. Such differences are recorded once determined and have historically not been significant.

Segment Reporting

The Company operates as a single operating segment for purposes of presenting financial information and evaluating performance. As such, the accompanying consolidated financial statements present financial information in a format that is consistent with the internal financial information used by management. The Company does not accumulate revenues by product classification and, therefore, it is impractical to present such information.

Shipping and Handling Costs

Shipping and handling costs are reported in selling, general and administrative expenses in the accompanying consolidated statements of income. Such costs aggregated $69.8 million in Fiscal 2020, $72.4 million in Fiscal 2019 and $63.3 million in Fiscal 2018. 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.

Trade Receivables

Trade receivables are recorded at net realizable value, which includes an estimated allowance for doubtful accounts. The Company extends credit based on an evaluation of each customer’s financial condition, generally without requiring collateral. Exposure to credit losses varies by customer principally due to the financial condition of each customer. The Company continually monitors our exposure to credit losses and maintains allowances for anticipated losses based on our experience with past due accounts, collectability and our analysis of customer data. Actual future losses from uncollectible accounts could differ from the Company’s estimate. Changes in the allowance for doubtful accounts was as follows:

As of May 2, 2020, and April 27, 2019, the Company had no customer that comprised more than 10% of trade receivables. No customer accounted for more than 10% of net sales during any of the last three fiscal years.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Although these estimates are based on management's knowledge of current events and anticipated future actions, actual results may vary from reported amounts. 

Depreciation expense was $14.4 million for Fiscal 2020, $12.8 million for Fiscal 2019 and $11.1 million for Fiscal 2018.

4.      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 our 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 Fiscal 2020 under Topic 842 was $15.1 million.  The weighted-average remaining lease term and weighted average discount rate of operating leases was 4.3 years and 3.38%, respectively as of May 2, 2020.  Net cash provided by operations was impacted by $12.1 million for operating leases for the year ended May 2, 2020.

The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases as of May 2, 2020:

Under the prior accounting guidance of ASC 840, operating lease expense was $18.2 million and $13.3 million for Fiscal years 2019 and 2018, respectively. 

Minimum lease payments under non-cancelable operating leases as of April 27, 2019 were as follows:

5.      DEBT

At May 2, 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 May 2, 2020 or April 27, 2019. At May 2, 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 May 2, 2020, the Company was in compliance with all loan covenants.

6.      CAPITAL STOCK AND TRANSACTIONS WITH RELATED PARTIES

The Board of Directors has authorized the Company to repurchase up to 1.6 million shares of common stock. During Fiscal 2020, the Company purchased an aggregate 154,512 shares for a cost of $6.2 million. As of May 2, 2020, 656,572 shares were purchased under the program and 943,428 shares were available for repurchase.

The Company paid a special cash dividend on Common Stock of $135.2 million ($2.90 per share) on January 29, 2019 and $69.9 million ($1.50 per share) on August 4, 2017. No dividends were declared or paid in Fiscal year 2020.

The Company is a party to a management agreement with Corporate Management Advisors, Inc. (CMA), a corporation owned by our Chairman and Chief Executive Officer. This agreement was originated in 1991 for the efficient use of management of two public companies at the time. In 1994, one of those public entities, through a merger, no longer was managed in this manner.

Under the terms of the agreement, CMA provides, subject to the direction and supervision of the Board of Directors of the Company, (i) senior corporate functions (including supervision of the Company’s financial, legal, executive recruitment, internal audit and information systems departments) as well as the services of a Chief Executive Officer and Chief Financial Officer, and (ii) services in connection with acquisitions, dispositions and financings by the Company, including identifying and profiling acquisition candidates, negotiating and structuring potential transactions and arranging financing for any such transaction. CMA, through its personnel, also provides, to the extent possible, the stimulus and creativity to develop an innovative and dynamic persona for the Company, its products and corporate image. In order to fulfill its obligations under the management agreement, CMA employs numerous individuals, who, acting as a unit, provide management, administrative and creative functions for the Company.

CMA and the Company are joint owners of a corporate aircraft and each party agreed to pay certain expenses associated with the use of the aircraft.  During the past three years, the Company's operating costs have averaged approximately $.8 million per year and lease buy-down payments and financing costs have averaged approximately $.8 million per year.  In conjunction with an inquiry by the Securities and Exchange Commission, the Company is in the process of reviewing the aircraft usage to ensure that expenses may be properly allocated.  This review is not expected to have a material effect on the Company's consolidated financial statements, but could result in adjustments between CMA and the Company or modify other disclosures.

The management agreement provides that the Company will pay CMA an annual base fee equal to one percent of the consolidated net sales of the Company, and further provides that the Compensation and Stock Option Committee and the Board of Directors may from time to time award additional incentive compensation to CMA or its personnel.  The Board of Directors on numerous occasions contemplated incentive compensation to CMA, however, since the inception of this agreement, no incentive compensation has been paid.  We incurred management fees to CMA of $10.0 million for Fiscal 2020, $10.2 million for Fiscal 2019, and $9.8 million for Fiscal 2018.  Included in accounts payable were amounts due CMA of $2.6 million at May 2, 2020 and $2.4 million at April 27, 2019. 

7.      DERIVATIVE FINANCIAL INSTRUMENTS

From time to time, the Company enters 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 hedge was immaterial. The following summarizes the gains (losses) recognized in the Consolidated Statements of Income and AOCI relative to the cash flow hedges for Fiscal 2020, Fiscal 2019 and Fiscal 2018:

As of May 2, 2020, the notional amount of our outstanding aluminum swap contracts was $49.3 million and, assuming no change in the commodity prices, $6.7 million of unrealized loss before tax will be reclassified from AOCI and recognized in cost of sales over the next 12 months.

As of May 2, 2020, and April 27, 2019, the fair value of the derivative liability was $6.9 million and $2.0 million, respectively, 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.

Deferred taxes are recorded to give recognition to temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. Valuation allowances are established to reduce the carrying amounts of deferred tax assets when it is deemed more likely than not that the benefit of deferred tax assets will not be realized. Deferred tax assets and liabilities as of May 2, 2020 and April 27, 2019 consisted of the following:

The reconciliation of the statutory federal income tax rate to our effective tax rate is as follows:

As of May 2, 2020, the gross amount of unrecognized tax benefits was $2.0 million and $91,000 was recognized as tax expense in Fiscal 2020. If the Company is to prevail on all uncertain tax positions, the net effect would be to reduce our tax expense by approximately $1.6 million. A reconciliation of the changes in the gross amount of unrecognized tax benefits, which amounts are included in other liabilities in the accompanying consolidated balance sheets, is as follows:

Accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. As of May 2, 2020, unrecognized tax benefits included accrued interest of $267,000, of which approximately $15,000 was recognized as tax expense in Fiscal 2020.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act made changes to the U.S. tax code, including reducing the U.S. federal tax rate from 35% to 21% effective January 1, 2018. The phasing in of the lower corporate income tax rate results in a blended federal statutory rate of 30.4% for our Fiscal 2018, compared with the previous 35% rate. Included in the effective tax rate for Fiscal 2018 is a one-time adjustment reducing income tax expense to remeasure previous deferred tax liabilities of $4.3 million.

Annual income tax returns are filed in the United States and in various state and local jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, are resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, The Company believes that unrecognized tax benefits reflect the most probable outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. The resolution of any particular uncertain tax position could require the use of cash and an adjustment to our provision for income taxes in the period of resolution. Federal income tax returns for fiscal years subsequent to 2016 are subject to examination. Generally, the income tax returns for the various state jurisdictions are subject to examination for fiscal years ending after fiscal 2013.

9.      LEGAL PROCEEDINGS

The Company has been named in certain legal proceedings, including those containing derivative and class action allegations.  One complaint alleges the Company’s LaCroix branded products contain synthetic ingredients and therefore violate state consumer protection statutes and other laws.  A similar consumer complaint was voluntarily dismissed during Fiscal 2020 along with a full written retraction of all claims by the plaintiff and counsel. The Company is vigorously defending all legal proceedings and believes litigation will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.  

10.      STOCK-BASED COMPENSATION

Our stock-based compensation program is a broad-based program designed to attract and retain personnel while also aligning participants’ interests with the interests of the shareholders.

The 1991 Omnibus Incentive Plan (the Omnibus Plan) provides for compensatory awards consisting of (i) stock options or stock awards for up to 4,800,000 shares of common stock, (ii) stock appreciation rights, dividend equivalents, other stock-based awards in amounts up to 4,800,000 shares of common stock and (iii) performance awards consisting of any combination of the above. The Omnibus Plan is designed to provide an incentive to officers and certain other key employees and consultants by making available to them an opportunity to acquire a proprietary interest or to increase such interest in National Beverage. The number of shares or options which may be issued under stock-based awards to an individual is limited to 1,680,000 during any year. Awards may be granted for no cash consideration or such minimal cash consideration as may be required by law. Options generally have an exercise price equal to the fair market value of our common stock on the date of grant, vest over a five-year period and expire after ten years.

The Special Stock Option Plan provides for the issuance of stock options to purchase up to an aggregate of 1,800,000 shares of common stock. Options may be granted for such consideration as determined by the Board of Directors. The vesting schedule and exercise price of these options are tied to the recipient’s ownership level of common stock and the terms generally allow for the reduction in exercise price upon each vesting period. Also, the Board of Directors authorized the issuance of options to purchase up to 50,000 shares of common stock to be issued at the direction of the Chairman.

The Key Employee Equity Partnership Program (KEEP Program) provides for the granting of stock options to purchase up to 240,000 shares of common stock to key employees, consultants, directors and officers. Participants who purchase shares of stock in the open market receive grants of stock options equal to 50% of the number of shares purchased, up to a maximum of 6,000 shares in any two-year period. Options under the KEEP Program are forfeited in the event of the sale of shares used to acquire such options. Options are granted at an initial exercise price of 60% of the purchase price paid for the shares acquired and the exercise price reduces to the stock par value at the end of the six-year vesting period.

Stock options are accounted for under the fair value method of accounting using a Black-Scholes valuation model to estimate the stock option fair value at date of grant. The fair value of stock options is amortized to expense over the vesting period. Stock options for 9,000 shares were granted in Fiscal 2019 and 500 shares in Fiscal 2018. No stock options were issued during Fiscal 2020. The weighted average Black-Scholes fair value assumptions for stock options granted are as follows: weighted average expected life of 8.0 years for Fiscal 2019 and 8.0 years for Fiscal 2018; weighted average expected volatility of 21.7% for Fiscal 2019 and 23.8% for Fiscal 2018; weighted average risk free interest rates of 2.6% for Fiscal 2019 and 2.4% for Fiscal 2018; and expected dividend yield of 1.6% for Fiscal 2019 and 1.6% for Fiscal 2018.  The expected life of stock options was estimated based on historical experience.  The expected volatility was estimated based on historical stock prices for a period consistent with the expected life of stock options.  The risk free interest rate was based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of stock options. There were no forfeitures estimated in Fiscal 2019 and Fiscal 2018.

The following is a summary of stock option activity for Fiscal 2020:

^(a) Weighted average exercise price.

Stock-based compensation expense was $126,000 for Fiscal 2020, $251,000 for Fiscal 2019, and $161,000 for Fiscal 2018. The total fair value of shares vested was $768,000 for Fiscal 2020, $127,000 for Fiscal 2019, and $140,000 for Fiscal 2018.

The total intrinsic value for stock options exercised was $4.9 million for Fiscal 2020, $2.2 million for Fiscal 2019, $3.0 million for Fiscal 2018. Net cash proceeds from the exercise of stock options were $740,000 for Fiscal 2020, $456,000 for Fiscal 2019, $560,000 for Fiscal 2018. Stock based income tax benefits aggregated $974,000 for Fiscal 2020, $443,000 for Fiscal 2019, and $886,000 for Fiscal 2018. The weighted average fair value for stock options granted was $63.71 for Fiscal 2020.

As of May 2, 2020, unrecognized compensation expense related to the unvested portion of stock options was $465,000, which is expected to be recognized over a weighted average period of 4.5 years. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of May 2, 2020 was 3.7 years and $7.0 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of April 27, 2019 was 3.3 years and $14.9 million, respectively.

11.      PENSION PLANS

The Company contributes to certain pension plans under collective bargaining agreements and to a discretionary profit sharing plan. Annual contributions (including contributions to multi-employer plans reflected below) were $3.6 million for Fiscal 2020, $3.8 million for Fiscal 2019, and $3.4 million for Fiscal 2018.

The Company participates in three multi-employer defined benefit pension plans with respect to certain collective bargaining agreements. If the Company chooses to stop participating in the multi-employer plan or if other employers choose to withdraw to the extent that a mass withdrawal occurs, the Company could be required to pay the plan a withdrawal liability based on the underfunded status of the plan.

Summarized below is certain information regarding the Company’s participation in significant multi-employer pension plans including the financial improvement plan or rehabilitation plan status (“FIP/RP Status”) and the zone status under the Pension Protection Act (“PPA”). The most recent PPA zone status available in Fiscal 2020 and Fiscal 2019 is for the plans’ years ending December 31, 2018 and 2017, respectively.

For the plan years ended December 31, 2018 and December 31, 2017, the Company was not listed in the Form 5500 Annual Returns as providing more than 5% of the total contributions for the above plans. The collective bargaining agreements for employees in the CSSS Fund and the WCT Fund expire on October 18, 2021 and May 14, 2021, respectively.

The Company’s contributions for all multi-employer pension plans for the last three Fiscal years are as follow:

12.      COMMITMENTS AND CONTINGENCIES

The Company enters into various agreements with suppliers for the purchase of raw materials, the terms of which may include variable or fixed pricing and minimum purchase quantities. As of May 2, 2020 the Company had purchase commitments for raw materials of $22.6 million through 2023. 

As of May 2, 2020, the Company had purchase commitments for plant and equipment of $5.1 million anticipated to be completed in the 2021 fiscal year.