FIZZ 10-Q Quarter ended Jan. 27, 2018

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 27, 2018

Commission file number 1-14170

NATIONAL BEVERAGE CORP.

(Exact name of registrant as specified in its charter)

Delaware	59-2605822
(State of incorporation)	(I.R.S. Employer Identification No.)

8100 SW Tenth Street, Suite 4000, Fort Lauderdale, FL 33324

(Address of principal executive offices including zip code)

(954) 581-0922

(Registrant ’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( ✔) No (  )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (✔) No (  )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (  ) Accelerated filer (✔) Non-accelerated filer (  ) Smaller reporting company (  ) Emerging growth company (  )

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (  )

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (  ) No ( ✔)

The number of shares of registrant ’s common stock outstanding as of March 2, 2018 was 46,608,690.

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NATIONAL BEVERAGE CORP.

QUARTERLY REPORT ON FORM 10-Q

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of January 27, 2018 and April 29, 2017	3
Consolidated Statements of Income for the Three and Nine Months Ended January 27, 2018 and January 28, 2017	4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended January 27, 2018 and January 28, 2017	5
Consolidated Statements of Shareholders ’ Equity for the Nine Months Ended January 27, 2018 and January 28, 2017	6
Consolidated Statements of Cash Flows for the Nine Months Ended January 27, 2018 and January 28, 2017	7
Notes to Consolidated Financial Statements	8
Item 2.  Management ’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	16
Item 4. Controls and Procedures	16
PART II - OTHER INFORMATION
Item 1A. Risk Factors	17
Item 6. Exhibits	17
Signature	18

		January 27,				April 29,
		2018				2017
Assets
Current assets:
Cash and equivalents		$	155,023			$	136,372
Trade receivables - net			75,942				71,319
Inventories			60,832				53,355
Prepaid and other assets			13,219				7,275
Total current assets			305,016				268,321
Property, plant and equipment - net			75,009				65,150
Goodwill			13,145				13,145
Intangible assets			1,615				1,615
Other assets			5,907				5,752
Total assets		$	400,692			$	353,983
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$	58,499			$	58,100
Accrued liabilities			32,158				29,017
Income taxes payable			103				89
Total current liabilities			90,760				87,206
Deferred income taxes - net			7,752				12,087
Other liabilities			8,675				9,072
Shareholders' equity:
Preferred stock, $1 par value - 1,000,000 shares authorized: Series C - 150,000 shares issued			150				150
Common stock, $.01 par value - 75,000,000 shares authorized; 50,641,234 shares issued (50,616,134 shares at April 29)			506				506
Additional paid-in capital			36,156				35,638
Retained earnings			271,382				227,928
Accumulated other comprehensive income (loss)			3,311				(604	)
Treasury stock - at cost:
Series C preferred stock - 150,000 shares			(5,100	)			(5,100	)
Common stock - 4,032,544 shares			(12,900	)			(12,900	)
Total shareholders' equity			293,505				245,618
Total liabilities and shareholders' equity		$	400,692			$	353,983

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		Three Months Ended								Nine Months Ended
		January 27,				January 28,				January 27,				January 28,
		2018				2017				2018				2017
Net sales		$	227,477			$	194,564			$	731,428			$	614,852
Cost of sales			136,284				118,644				439,652				374,721
Gross profit			91,193				75,920				291,776				240,131
Selling, general and administrative expenses			45,443				39,158				137,589				122,043
Interest expense			50				51				151				139
Other income - net			426				197				1,043				416
Income before income taxes			46,126				36,908				155,079				118,365
Provision for income taxes			5,046				12,623				41,747				40,481
Net income		$	41,080			$	24,285			$	113,332			$	77,884
Earnings per common share:
Basic		$	.88			$	.52			$	2.43			$	1.67
Diluted		$	.88			$	.52			$	2.42			$	1.67
Weighted average common shares outstanding:
Basic			46,603				46,566				46,594				46,561
Diluted			46,923				46,763				46,921				46,764

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		Three Months Ended								Nine Months Ended
		January 27,				January 28,				January 27,				January 28,
		2018				2017				2018				2017
Net income		$	41,080			$	24,285			$	113,332			$	77,884
Other comprehensive income, net of tax:
Cash flow hedges			1,296				520				3,915				1,775
Comprehensive income		$	42,376			$	24,805			$	117,247			$	79,659

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		Nine Months Ended
		January 27,				January 28,
		2018				2017
Series C Preferred Stock
Beginning and end of period		$	150			$	150
Common Stock
Beginning and end of period			506				506
Additional Paid-In Capital
Beginning of period			35,638				34,570
Stock options exercised			399				186
Stock-based compensation			119				146
Stock-based tax benefits			-				153
End of period			36,156				35,055
Retained Earnings
Beginning of period			227,928				190,733
Net income			113,332				77,884
Common stock cash dividend			(69,878	)			(69,850	)
End of period			271,382				198,767
Accumulated Other Comprehensive Loss
Beginning of period			(604	)			(1,807	)
Cash flow hedges, net of tax			3,915				1,775
End of period			3,311				(32	)
Treasury Stock - Series C Preferred
Beginning and end of period			(5,100	)			(5,100	)
Treasury Stock - Common
Beginning and end of period			(12,900	)			(12,900	)
Total Shareholders' Equity		$	293,505			$	216,446

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		Nine Months Ended
		January 27,				January 28,
		2018				2017
Operating Activities:
Net income		$	113,332			$	77,884
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			10,273				9,600
Deferred income tax benefit			(5,806	)			(189	)
Gain on sale of property, net			(9	)			(5	)
Stock-based compensation			119				146
Stock-based tax benefits			-				153
Changes in assets and liabilities:
Trade receivables			(4,623	)			(7,664	)
Inventories			(7,477	)			(518	)
Prepaid and other assets			(1,840	)			(1,703	)
Accounts payable			399				282
Accrued and other liabilities			2,390				3,586
Net cash provided by operating activities			106,758				81,572
Investing Activities:
Additions to property, plant and equipment			(18,686	)			(11,834	)
Proceeds from sale of property, plant and equipment			58				15
Net cash used in investing activities			(18,628	)			(11,819	)
Financing Activities:
Dividends paid on common stock			(69,878	)			(69,850	)
Proceeds from stock options exercised			399				186
Net cash used in financing activities			(69,479	)			(69,664	)
Net Increase in Cash and Equivalents			18,651				89
Cash and Equivalents - Beginning of Period			136,372				105,577
Cash and Equivalents - End of Period		$	155,023			$	105,666
Other Cash Flow Information:
Interest paid		$	76			$	165
Income taxes paid		$	48,848			$	40,389

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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 January 27, 2018 were comprised of finished goods of $37.2 million and raw materials of $23.6 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:

Depreciation expense was $ 2.7 million and $8.8 million for the three and nine months ended January 27, 2018, respectively, and $2.7 million and $8.1 million for the three and nine months ended January 28, 2017, respectively.

3 .

DEBT

At January 27, 2018, 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 January 27, 2018 or April 29, 2017. At January 27, 2018, $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 January 27, 2018, we were in compliance with all loan covenants.

4 . STOCK-BASED COMPENSATION

During the nine months ended January 27, 2018, options to purchase 25,100 shares were exercised (weighted average exercise price of $15.89 per share) and options to purchase 1,300 shares were cancelled (weighted average exercise price of $17.59 per share). At January 27, 2018, options to purchase 357,695 shares (weighted average exercise price of $11.15 per share) were outstanding and stock-based awards to purchase 2,811,314 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 nine months ended January 27, 2018 and January 28, 2017:

As of January 27, 2018, the notional amount of our outstanding aluminum swap contracts was $33.6 million and, assuming no change in the commodity prices, $4.7 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 January 27, 2018, the fair value of the derivative asset was $4.7 million, which was included in prepaid and other assets. 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 $153,000 for the nine months ended January 28, 2017. 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 $120,000 and $681,000 for the three and nine months ended January 27, 2018, 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 Sta ndards 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. Management is completing its evaluation and adoption is not expected to have a material impact on our financial position, results of operations or cash flows. Disclosure requirements under the new guidance have been significantly expanded.

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.

In February 2018, the FASB issued Accounting Standards Update 2018 - 02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018 - 02” ). This update permits the impact of lower corporate income tax rates related to items classified in accumulated other comprehensive income to be reclassified directly to retained earnings. We adopted ASU 2018 - 02 effective for our third quarter ended January 27, 2018. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings .

7 . COMMITMENTS AND CONTINGENCIES

As of January 27, 2018, we guaranteed the residual value of certain leased equipment in the amount of $1.6 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 . INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act makes 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. The federal statutory tax rate will be reduced to 21% in subsequent fiscal years.

On December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 1 18 (“SAB 118” ), which clarifies accounting for income taxes under FASB’s Accounting Standards Codification 740 in the reporting period that include the enactment date of the Tax Act. SAB 118 allows a company to report provisional estimates in the reporting period that include the enactment date if the company does not have the necessary information to fully analyze certain income tax effects of the Tax Act.

We are compelled by regulations to record a one -time adjustment to remeasure previous deferred tax liabilities by $4.3 million and adjust prior year-to-date income tax to the estimated effective tax rate for the full year resulting in a $7 million reduction in tax expense .

Accordingly, our effective tax rate for the third quarter and first nine months of fiscal 2018 was 10.9% and 26.9%, respectively. For the third quarter and first nine months of fiscal 2017, the effective tax rate was 34.2%.

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