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.
(1) The retail industry is in revolution. In prior years, each retailer induced
their consumer with a proprietary brand (especially soft drinks), but today
understands that the well-informed, smart consumer is demanding that
retailers provide recognizable brands that have earned their respective
consumer standing on their merits.
(2) Retail today is in the most competitively-indexed service industry, without
exception. Innovation, plus the urgent time demands on the consumer,
requires quick, expedient shopping. Home delivery is even more of a current
shoppers' choice. Retailers cannot carry slower-moving items that home
delivery will not support.
(3) The new consumer is the most competent/knowledgeable product analyzer ever,
and personal mental/physical lifestyles demand that healthier is their
preferred choice. Calories must qualify as worthy; sugar being enemy #1 in
the life of the Millennial and younger consumers. 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. 17
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Presently, our primary market focus isthe United States andCanada . 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 and weather conditions. While prior years witnessed more seasonality, higher sales are realized during the summer 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, make quarter-to-quarter comparisons unworthy statistics and forces companies to decision making for that purpose, not truly beneficial for investors and shareholders alike.
Traditional and typical are not a part of an innovator's vocabulary.
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Table of Contents RESULTS OF OPERATIONS The following section generally discusses the fiscal years endedMay 2, 2020 (Fiscal 2020) andApril 27, 2019 (Fiscal 2019) items and year-to-year comparisons between Fiscal 2020 and Fiscal 2019. Discussions of fiscal year endedApril 28, 2018 (Fiscal 2018) items and year-to-year comparisons between Fiscal 2019 and Fiscal 2018 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedApril 27, 2019 , which is available free of charge on our website at www.nationalbeverage.com. Fiscal 2020 consisted of 53 weeks; Fiscal 2019 and Fiscal 2018 both consisted of 52 weeks.Net Sales Net sales for Fiscal 2020 declined 1.4% to$1,000 million compared to$1,014 million for Fiscal 2019. The decline in sales resulted from a 1.4% reduction in average selling price per case due primarily to changes in product mix. Power+ Brands volume declined 3.4% and branded carbonated soft drinks volume increased 6.6%. Gross Profit Gross profit for Fiscal 2020 was$370.1 million compared to$384.4 million for Fiscal 2019. The change in gross profit is due to a 1.0% increase in cost per case resulting primarily from changes in product mix and increased manufacturing costs. Gross margin was 37.0% for Fiscal 2020 compared to 37.9% in Fiscal 2019. Shipping and handling costs are included in selling, general and administrative expenses, the classification of which is consistent with many beverage companies. However, our gross margin may not be comparable to companies that include shipping and handling costs in cost of sales. See Note 1 of Notes to Consolidated Financial Statements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
Interest Expense and Other Expense (Income) - Net
Other income, net is primarily interest income of$3.9 million for Fiscal 2020 and$4.1 million for Fiscal 2019. The change in interest income is due to lower investment yields on an increased average investment balances. Interest expense is comprised of fees related to maintaining lines of credit. Interest expense was essentially flat for all years presented.
Income Taxes
Our effective tax rate was 23.3% for Fiscal 2020 and 23.4% for Fiscal 2019. The differences between the effective rate and the federal statutory rate were primarily due to the effects of state income taxes.
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LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
AtMay 2, 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. Cash generated from operations is our principal source of funds. We believe that existing capital resources will be sufficient to meet our liquidity and capital requirements for the next twelve months. See Note 5 of Notes to Consolidated Financial Statements. Expenditures for property, plant and equipment amounted to$23.9 million for Fiscal 2020 primarily to expand production capacity. We continually evaluate capital projects to expand our production capacity, enhance packaging capabilities or improve efficiencies at our production facilities. We intend to continue production capacity and efficiency improvement projects in fiscal year 2021 and expect capital expenditures to be comparable to Fiscal 2020. The Company paid special cash dividends on Common Stock of$135.2 million ($2.90 per share) onJanuary 29, 2019 and$69.9 million ($1.50 per share) onAugust 4, 2017 . 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 ofMay 2, 2020 , 656,572 shares were purchased under the program and 943,428 shares were available for repurchase. Pursuant to a management agreement, we incurred a fee toCorporate Management Advisors, Inc. (CMA) of$10.0 million for Fiscal 2020 and$10.2 million for Fiscal 2019. AtMay 2, 2020 , management fees payable to CMA were$2.6 million . See Note 6 of Notes to Consolidated Financial Statements.
Cash Flows
During Fiscal 2020,$177.7 million was provided by operating activities,$23.9 million was used in investing activities and$5.5 million was used in financing activities. Cash provided by operating activities increased$38.3 million primarily due to decreased working capital requirements and increased depreciation and amortization offset in part by lower net income. Cash used in investing activities decreased due to reduced capital expenditures. Cash used in financing activities includes the$6.2 million of stock repurchased during Fiscal 2020. In Fiscal 2019,$135.2 million ($2.90 per share) special cash dividend was paid onJanuary 29, 2019 .
Financial Position
During Fiscal 2020, our working capital increased to$319.0 million from$224.4 million atApril 27, 2019 . The increase in working capital resulted from increased cash and equivalents generated by operations and reduced inventories offset in part by increased current liabilities. Current liabilities in Fiscal 2020 increased in part due to the adoption of the new lease Accounting Standards Update No. 2016-02, "Leases." (Topic 842). Trade receivables increased slightly and days sales outstanding was 29.5 days compared to 32.2 days for 2019. Inventories decreased$7.2 million or 10.2% as a result of reductions in finished goods and raw materials. Annual inventory turns increased to 9.4 from 8.8 times. As ofMay 2, 2020 andApril 27, 2019 , the current ratio was 3.3 to 1. 20
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Table of Contents CONTRACTUAL OBLIGATIONS
Contractual obligations at
(In thousands) 1 Year More Than Total Or less 2 to 3 Years 3 to 5 Years 5 Years Operating leases$ 52,394 $ 14,206 $ 22,251 $ 11,836 $ 4,101 Purchase commitments 22,598 17,505 5,093 - - Total$ 74,992 $ 31,711 $ 27,344 $ 11,836 $ 4,101
We contribute to certain pension plans under collective bargaining agreements
and to a discretionary profit sharing plan. Annual contributions were
We maintain self-insured and deductible programs for certain liability, medical and workers' compensation exposures. Other long-term liabilities include known claims and estimated incurred but not reported claims not otherwise covered by insurance based on actuarial assumptions and historical claims experience. Since the timing and amount of claim payments vary significantly, we are not able to reasonably estimate future payments for specific periods and therefore such payments have not been included in the table above. Standby letters of credit aggregating$3.4 million have been issued in connection with our self-insurance programs. These standby letters of credit expire throughJune 2021 and are expected to be renewed.
OFF-BALANCE SHEET ARRANGEMENTS AND ESTIMATES
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition.
CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity withUnited States generally accepted accounting principles 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 actions it may undertake in the future, they may ultimately differ from actual results. We believe that the critical accounting policies described in the following paragraphs comprise the most significant estimates and assumptions used in the preparation of our consolidated financial statements. For these policies, we caution that future events rarely develop exactly as estimated and the best estimates routinely require adjustment.
Credit Risk
We sell products to a variety of customers and extend 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. We monitor our exposure to credit losses and maintain allowances for anticipated losses based on our experience with past due accounts, collectability and our analysis of customer data. 21
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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 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 we believe 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 We maintain self-insured and deductible programs for certain liability, medical and workers' compensation exposures. Accordingly, we accrue for known claims and estimated incurred but not reported claims not otherwise covered by insurance based on actuarial assumptions and historical claims experience.
Revenue Recognition
We recognize revenue 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. We estimate and reserve for bad debt exposure based on our experience with past due accounts, collectability and our analysis of customer data. We offer various sales incentive arrangements 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. We adopted ASU 2014-09, Revenue from Contracts with Customers, and its amendments onApril 29, 2018 . 22
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Table of Contents FORWARD-LOOKING STATEMENTSNational 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 theSecurities 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 theSecurities 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.
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