National Beverage Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 26, 2019; comparisons are to periods ended January 27, 2018. The company develops, produces, markets and sells beverages, including LaCroix and other sparkling waters, juices, energy drinks, and carbonated soft drinks, primarily in North America. Amounts below are in U.S. dollars.
Financial performance
| Metric | Third quarter | First nine months |
|---|---|---|
| Net sales | $220.9 million, down 2.8% | $774.2 million, up 5.8% |
| Gross profit / margin | $80.6 million / 36.5%; prior-year margin 40.1% | $299.8 million / 38.7%; prior-year margin 39.9% |
| Net income | $24.8 million, versus $41.1 million | $114.7 million, versus $113.3 million |
| Diluted earnings per share | $0.53, versus $0.88 | $2.44, versus $2.42 |
| SG&A expense | $49.5 million; 22.4% of sales | $153.6 million; 19.8% of sales |
For the nine months, operating cash flow was $107.0 million, compared with $106.8 million; capital expenditures were $27.5 million, versus $18.7 million. Cash and equivalents were $269.9 million at January 26, 2019, up from $189.9 million at April 28, 2018. The company reported no outstanding borrowings on its $100 million revolving facilities; $97.9 million was available after letters of credit. It said existing resources should cover liquidity and capital needs for the next 12 months.
Working capital was $206.5 million, down from $248.3 million at April 28, 2018, and the current ratio was 1.9, versus 3.4. The company attributed much of the decline to a $135.2 million special dividend accrued at quarter-end and paid January 29, 2019. The dividend was $2.90 per share. No debt was outstanding, and the company reported compliance with credit-facility covenants.
Changes and management commentary
- Third-quarter branded case volume declined 4.1%; Power+ Brands volume fell 5.8%, while carbonated soft drink volume was flat. Management attributed the Power+ decline principally to media coverage of LaCroix marketing and labeling litigation. Average selling price per case rose 3.7%, partly offsetting lower volume.
- For the first nine months, branded case volume rose 7.9%, including 13.5% growth in Power+ Brands, partly offset by lower carbonated soft drink volume. Average selling price per case increased 3.4%.
- Cost of sales per case increased 9.7% in the quarter and 5.4% year to date, with aluminum, freight and fixed manufacturing costs cited as factors. SG&A increases reflected marketing, distribution costs and retailer-execution resources.
- Third-quarter net income was also affected by the comparison with the prior-year quarter, which included a one-time tax adjustment and a $7 million reduction in tax expense. The effective tax rates were 23% in the current quarter and 10.9% in the prior-year quarter.
- Management expects increased capital expenditures, primarily to expand production capacity. The filing provides no specific earnings or sales guidance and cautions that seasonality, weather, product development and promotional timing can affect results.
Risks, contingencies and unusual items
- The company faces derivative and class-action complaints alleging that LaCroix products contain synthetic ingredients and violate consumer-protection, marketing or labeling laws. It disputes the allegations and says the litigation is not expected to have a material adverse effect.
- Aluminum swaps are used to partially mitigate commodity-cost exposure. The outstanding notional amount was $57.6 million; $1.6 million of unrealized losses before tax was expected to be reclassified to earnings over the next 12 months, assuming no change in commodity prices.
- The company expects its adoption of the new lease standard in fiscal 2020 to increase lease-related assets and liabilities; it was still evaluating the income-statement effect. It anticipated no cash-flow impact from adoption.
- Management identified risks including raw-material and packaging costs, ability to pass cost increases to customers, consumer preferences and brand image, retailer support, weather, competition, regulation and execution of product and growth strategies. It reported no material changes in risk factors from its prior annual report.
Important facts for investors to verify
- Whether LaCroix-related publicity and litigation continue to affect Power+ volume, and the status and potential consequences of the lawsuits.
- Whether sales-volume trends, pricing and product mix can offset continued increases in aluminum, freight and manufacturing costs.
- Planned capacity-related capital spending and its effect on cash generation and production growth.
- The cash and working-capital effect of the special dividend paid after quarter-end, and the company’s ongoing liquidity position.
- The timing and earnings impact of aluminum-hedge losses and adoption of the lease-accounting standard.