FIZZ 10-Q Quarter ended Oct. 31, 2020

NATIONAL BEVERAGE CORP.

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NATIONAL BEVERAGE CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NATIONAL BEVERAGE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NATIONAL BEVERAGE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NATIONAL BEVERAGE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands) (Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NATIONAL BEVERAGE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NATIONAL BEVERAGE CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

Basis of Presentation

The condensed consolidated financial statements include the accounts of National Beverage Corp. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated.

The accompanying interim unaudited condensed 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 condensed 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 May 2, 2020. The accounting policies used in these interim unaudited condensed 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 interim unaudited condensed 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.

Reclassification

Certain reclassifications have been made to prior period balances in order to conform to the current period's presentation.

Inventories

Inventories are stated at the lower of first -in, first -out cost or net realizable value. Inventories at October 31, 2020 were comprised of finished goods of $ 41.7 million and raw materials of $ 27.1 million. Inventories at May 2, 2020 were comprised of finished goods of $ 39.1 million and raw materials of $ 24.4 million.

Marketing Costs

The Company utilizes a variety of marketing programs, including cooperative advertising programs with customers, to advertise and promote its 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 $ 10.0 million for the three months ended October 31, 2020 and $ 13.6 million for the three months ended October 26, 2019. Marketing costs totaled $ 19.9 million for the six months ended October 31, 2020, and $ 28.7 million for the six months ended October 26, 2019.

Shipping and Handling Costs

Shipping and handling costs are reported in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.  Such costs totaled $ 18.5 million for the three months ended October 31, 2020 and $ 18.3 million for the three months ended October 26, 2019. Shipping and handling costs totaled $ 37.9 million for the six months ended October 31, 2020 and $ 36.4 million for the six months ended October 26, 2019. 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.

Summary of Significant Accounting Policies

There have been no significant changes in the Company's significant accounting policies during the six months ended October 31, 2020, compared to the significant accounting policies in our Annual Report on Form 10 -K for the fiscal year ended May 2, 2020.

Recent Accounting Pronouncement

On December 18, 2019, the Financial Accounting Standards Board issued Accounting Standards Update, “Simplifying the Accounting for Income Taxes” (ASU 2019 - 12 ). The new standard reduces the complexity pertaining to certain areas in accounting for income taxes. Key elements include, but are not limited to, the elimination of certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and changes in tax laws or rates, as well as clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.  ASU 2019 - 12 is effective for the Company's first quarter of fiscal year 2022. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements.

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2. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

		(In thousands)
		October 31, 2020					May 2, 2020
Land		$	9,835				$	9,835
Buildings and improvements			60,584					59,618
Machinery and equipment			247,343					238,300
Total			317,762					307,753
Less accumulated depreciation			( 194,284	)				( 187,126	)
Property, plant and equipment – net		$	123,478				$	120,627

Depreciation expense was $ 3.7 million for the three months ended October 31, 2020 and $ 3.8 million for the three months ended October 26, 2019. Depreciation expense totaled $ 7.5 million for the six months ended October 31, 2020 and $ 7.6 million for the six months ended October 26, 2019.

3. DEBT

At October 31, 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 28, 2022 to April 30, 2023 and any borrowings would currently bear interest at 1.0 % above one -month LIBOR. There were no borrowings outstanding under the Credit Facilities at October 31, 2020 or May 2, 2020. At October 31, 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 October 31, 2020, we were in compliance with all loan covenants.

4. STOCK-BASED COMPENSATION

During the six months ended October 31, 2020, options to purchase 131,750 shares were granted, options to purchase 29,000 shares were exercised and options to purchase 7,500 shares were cancelled at weighted average exercise prices of $ 46.94 , $ 13.90 and $ 5.67 respectively.  At October 31, 2020, options to purchase 289,795 shares at a weighted average exercise price of $ 28.98 per share were outstanding and stock-based awards to purchase 2,676,802 shares of common stock were available for grant.

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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 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 hedges was immaterial. The following summarizes the gains (losses) recognized in the Condensed Consolidated Statements of Income and AOCI :

		(In thousands)
		Three Months Ended								Six Months Ended
		2020				2019				2020				2019
Recognized in AOCI:
Gain (loss) before income taxes		$	2,131			$	( 619	)		$	7,211			$	( 2,043	)
Less income tax provision (benefit)			510				( 148	)			1,725				( 489	)
Net			1,621				( 471	)			5,486				( 1,554	)
Reclassified from AOCI to cost of sales:
(Loss) before income taxes			( 12	)			( 1,170	)			(1,844	)			( 2,614	)
Less income tax (benefit)			( 3	)			( 280	)			(441	)			( 625	)
Net			( 9	)			( 890	)			(1,403	)			( 1,989	)
Net change to AOCI		$	1,630			$	419			$	6,889			$	435

As of October 31, 2020, the notional amount of our outstanding aluminum swap contracts was $ 26.1 million and, assuming no change in commodity prices, $ 2.2 of unrealized gain before tax will be reclassified from AOCI and recognized in earnings over the next 12 months.

As of October 31, 2020, the fair value of the derivative asset was $ 2.2 million, which was included as a component of prepaid and other assets.  At May 2, 2020, the fair value of the derivative liability was $ 6.9 million, 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.

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6. 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 the 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 the three months ended October 31, 2020 and October 26, 2019 was $ 3.5 million and $ 3.4 million, respectively. Operating lease cost totaled $ 7.3 million for the six months ended October 31, 2020 and $ 6.7 million for the six months ended October 26, 2019. As of October 31, 2020, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.1 years and 3.1 %, respectively. As of May 2, 2020, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.3 years and 3.38 %, respectively. Cash payments were $ 3.5 million and $ 3.7 million, respectively, for operating leases for the three months ended October 31, 2020 and October 26, 2019. Cash payments totaled $ 7.0 million for the six months ended October 31, 2020 and $ 7.5 million for the six months ended October 26, 2019.

The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases as of October 31, 2020:

		(In thousands)
Fiscal 2021 - Remaining 2 quarters		$	8,993
Fiscal 2022			13,278
Fiscal 2023			9,367
Fiscal 2024			7,308
Fiscal 2025			4,399
Thereafter			3,823
Total minimum lease payments including interest			47,168
Less: Amounts representing interest			( 2,662	)
Present value of minimum lease payments			44,506
Less: Current portion of lease liabilities			( 15,796	)
Non-current portion of lease liabilities		$	28,710

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

		(In thousands)
Fiscal 2021		$	14,206
Fiscal 2022			13,276
Fiscal 2023			8,975
Fiscal 2024			7,361
Fiscal 2025			4,475
Thereafter			4,101
Total minimum lease payments including interest			52,394
Less: Amounts representing interest			( 3,255	)
Present value of minimum lease payments			49,139
Less: Current portion of lease liabilities			( 16,980	)
Non-current portion of lease liabilities		$	32,159

7. SUBSEQUENT EVENT

On November 24, 2020 , the Company declared a cash dividend of $ 3.00 per share payable to shareholders of record on December 4, 2020 . On December 2, 2020, the cash dividend was increased to $ 6.00 per share, approximately $ 280 million in the aggregate, which will be paid on or before February 2, 2021 .

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

National Beverage Corp. innovatively refreshes America with a distinctive portfolio of sparkling waters, juices, energy drinks (Power+ Brands) and, to a lesser extent, Carbonated Soft Drinks.  We believe our creative product designs, innovative packaging and imaginative flavors, along with our corporate culture and philosophy, make National Beverage unique as a stand-alone entity in the beverage industry.

Our strategy seeks the profitable growth of our products by (i) developing healthier beverages in response to the global shift in consumer buying habits and tailoring our beverage portfolio to the preferences of a diverse mix of ‘crossover consumers’ – a growing group desiring a healthier alternative to artificially sweetened and high-caloric beverages; (ii) emphasizing unique flavor development and variety throughout our brands that appeal to multiple demographic groups; (iii) maintaining points of difference through innovative marketing, packaging and consumer engagement and (iv) responding faster and more creatively to changing consumer trends than larger competitors who are burdened by legacy production and distribution complexity and costs.

The majority of our brands are geared to the active and health-conscious consumer including sparkling waters, energy drinks, and juices. Our portfolio of Power+ Brands includes LaCroix®, LaCroix Cúrate®, and LaCroix NiCola® sparkling water products; Clear Fruit® non-carbonated water beverages enhanced with fruit flavor; Rip It® energy drinks and shots; and Everfresh®, Everfresh Premier Varietals™ and Mr. Pure® 100% juice and juice-based products. Additionally, we produce and distribute carbonated soft drinks including Shasta® and Faygo®, iconic brands whose consumer loyalty spans more than 130 years.

Presently, our primary market focus is the United States and Canada.  Certain of our products are also distributed on a limited basis in other countries and options to expand distribution to other regions are being considered.  To service a diverse customer base that includes numerous national retailers, as well as thousands of smaller “up-and-down-the-street” accounts, we utilize a hybrid distribution system consisting of warehouse and direct-store delivery. The warehouse delivery system allows our retail partners to further maximize their assets by utilizing their ability to pick up product at our warehouses, further lowering their/our product costs.

Our operating results are affected by numerous factors, including fluctuations in the costs of raw materials, holiday and seasonal programming, changes in consumer purchasing habits and weather conditions. Beverage sales are seasonal with higher sales volume realized during the summer months when outdoor activities are more prevalent.

Our highly innovative business, where new beverages are developed and produced for selective holidays and ceremonial dates, should not be analyzed on the common three-month (quarterly) periods, traditionally found acceptable. Today, costly development projects and seasonal weather periods, plus promotional packaging, can distort quarter-to-quarter statistics and result in decision making that is not truly beneficial for investors and shareholders alike.

Traditional and typical are not a part of an innovator's vocabulary.

RESULTS OF OPERATIONS

Three Months Ended October 31, 2020 (second quarter of fiscal 202 1 ) compared to

Three Months Ended October 26, 2019 (second quarter of fiscal 2020)

Net sales for the second quarter of fiscal 2021 increased 8.0% to $271.8 million from $251.6 million for the second quarter of fiscal 2020. The increase in sales resulted primarily from a 7.4% increase in case volume. The volume increase includes a 11.1% increase of our Power+ Brands primarily attributable to increased consumer demand in the take-home channel.  Average selling price per case increased slightly.

Gross profit for the second quarter of fiscal 2021 increased to $108.0 million from $92.8 million for the second quarter of fiscal 2020. The increase in gross profit is due to increased volume and reduced raw material costs. The cost of sales per case decreased 3.5% and gross margin increased to 39.8% from 36.9% for the second quarter of fiscal 2020.

Selling, general and administrative expenses for the second quarter of fiscal 2021 decreased $4.7 million to $46.5 million from $51.2 million for the second quarter of fiscal 2020. The decrease was primarily due to reduced marketing and selling costs.  As a percent of net sales, selling, general and administrative expenses decreased to 17.1% from 20.3% for the second quarter of fiscal 2020.

Other income includes interest income of $112,000 for the second quarter of fiscal 2021 and $1.0 million for the second quarter of fiscal 2020. The decrease in interest income is due to lower return on investments.

The Company’s effective income tax rate, based upon estimated annual income tax rates, was 23.5% for the second quarter of fiscal 2021 and fiscal 2020. The difference between the effective rate and the federal statutory rate of 21% was primarily due to the effects of state income taxes.

Six Months Ended October 31, 2020 (first six months of fiscal 2021 ) compared to

Six Months Ended October 26, 2019 (first six months of fiscal 2020)

Net sales for the first six months of fiscal 2021 increased 9.7% to $565.2 million from $515.2 million for the first six months of fiscal 2020. The increase in sales resulted primarily from a 9.9% increase in case volume. The volume increase includes a 13.6% increase of our Power+ Brands primarily attributable to increased consumer demand in the take-home channel.  Average selling price per case was flat.

Gross profit for the first six months of fiscal 2021 increased to $225.3 million from $189.4 million for the first six months of fiscal 2020. The increase in gross profit is due to increased volume and reduced raw material costs. The cost of sales per case decreased 5.2% and gross margin increased to 39.9% from 36.8% for the first six months of fiscal 2020.

Selling, general and administrative expenses for the first six months of fiscal 2021 decreased $6.2 million to $97.0 million from $103.2 million for the first six months of fiscal 2020. The decrease was primarily due to reduced marketing and selling costs.  As a percent of net sales, selling, general and administrative expenses decreased to 17.2% from 20.0% for the first six months of fiscal 2020.

Other income includes interest income of $397,000 for the first six months of fiscal 2021 and $1.8 million for the first six months of fiscal 2020. The decrease in interest income is due to lower return on investments.

The Company’s effective income tax rate, based upon estimated annual income tax rates, was 23.5% for the first six months of fiscal 2021 and 23.6% for the first six months of fiscal 2020. The difference between the effective rate and the federal statutory rate of 21% was primarily due to the effects of state income taxes.

LIQUIDITY AND FINANCIAL CONDITION

Liquidity and Capital Resources

Our principal source of funds is cash generated from operations. At October 31, 2020, we maintained $100 million unsecured revolving credit facilities, under which no borrowings were outstanding and $3.4 million was reserved for standby letters of credit. We believe existing capital resources will be sufficient to meet our liquidity and capital requirements for the next twelve months.

On November 24, 2020, the Company declared a cash dividend of $3.00 per share payable to shareholders of record on December 4, 2020.  On December 2, 2020, the cash dividend was increased to $6.00 per share, approximately $280 million in the aggregate, which will be paid on or before February 2, 2021.

Cash Flows

The Company’s cash position increased $100.9 million for the six months of fiscal 2021, which compares to an increase of $77.7 million for the six months of fiscal 2020.

Net cash provided by operating activities for the first six months of fiscal 2021 amounted to $110.9 million compared to $87.2 million for the six months of fiscal 2020. For the first six months of fiscal 2021, cash flow was principally provided by net income of $98.3 million, depreciation and amortization of $9.2 million, and amortization of operating right of use assets of $6.6 million, offset in part by changes in working capital and other accounts.

Net cash used in investing activities for the first six months of fiscal 2021 reflects capital expenditures of $10.4 million, compared to capital expenditures of $9.6 million for the first six months of fiscal 2020. We intend to continue production capacity and efficiency improvement projects in fiscal 2021, and expect capital expenditures to be comparable to total fiscal 2020 levels.

Financial Position

At October 31, 2020, our working capital increased to $425.3 million from $319.0 million at May 2, 2020. The current ratio was 4.0 to 1 at October 31, 2020 compared to 3.3 to 1 at May 2, 2020.  The $106.3 million increase in working capital was primarily due to higher cash and inventory, partially offset by higher accounts payable and accrued liabilities.  Trade receivables decreased $2.1 million and days sales outstanding decreased from 32.2 to 27.7.  Inventories increased $5.3 million and inventory turns improved to 9.4 times from 8.4 times.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective to ensure information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

National Beverage Corp. and its representatives may make written or oral statements relating to future events or results relative to our financial, operational and business performance, achievements, objectives and strategies.  These statements are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 and include statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our stockholders. Certain statements including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “plans,” “expects,” and “estimates” constitute “forward-looking statements” and involve known and unknown risk, uncertainties and other factors that may cause the actual results, performance or achievements of our Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, the following: general economic and business conditions, pricing of competitive products, success of new product and flavor introductions, fluctuations in the costs and availability of raw materials and packaging supplies, ability to pass along cost increases to our customers, labor strikes or work stoppages or other interruptions in the employment of labor, continued retailer support for our products, changes in brand image, consumer demand and preferences and our success in creating products geared toward consumers’ tastes, success in implementing business strategies, changes in business strategy or development plans, government regulations, taxes or fees imposed on the sale of our products, unfavorable weather conditions and other factors referenced in this report, filings with the Securities and Exchange Commission and other reports to our stockholders.  We disclaim an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments.

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in risk factors from those reported in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020.

ITEM 6. EXHIBITS

Exhibit No.			Description
10.1			Credit Facility Amended Agreement, dated October 28, 2020 between NewBevCo, Inc. and lender therein (1)
10.2			Fourth Amendment to Second Amended Credit Agreement dated October 30, 2020 between NewBevCo, Inc. and lender therein (1)
21			Subsidiaries of Registrant (1)
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101			The following financial information from National Beverage Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2020 is formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to Condensed Consolidated Financial Statements.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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(1)	Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: December 10, 2020

	National Beverage Corp.
	(Registrant)
	By:	/s/ George R. Bracken
		George R. Bracken
		Executive Vice President – Finance (Principal Financial Officer)