National Beverage Corp. — Q3 FY2017 Form 10-Q
Reporting period: Third quarter ended January 28, 2017; year-to-date results cover the nine months ended that date. Comparisons are with the three and nine months ended January 30, 2016. National Beverage develops, produces, markets and sells sparkling waters, juices, energy drinks and carbonated soft drinks, primarily in North America.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | First nine months FY2017 | First nine months FY2016 |
|---|---|---|---|---|
| Net sales | $194.6 million | $161.7 million | $614.9 million | $525.8 million |
| Gross profit | $75.9 million | $52.6 million | $240.1 million | $176.1 million |
| Gross margin | 39.0% | 32.5% | 39.1% | 33.5% |
| SG&A | $39.2 million | $35.4 million | $122.0 million | $109.5 million |
| Net income | $24.3 million | $11.2 million | $77.9 million | $43.7 million |
| Diluted EPS | $0.52 | $0.24 | $1.67 | $0.93 |
| Operating cash flow | Not separately reported | Not separately reported | $81.4 million | $49.8 million |
Growth and margins: Q3 net sales rose 20.3%; case volume increased 17.5%, including 48.6% growth in Power+ Brands, while average selling price per case rose 2.3%. For the first nine months, sales rose 16.9%; case volume increased 16.8%, including 44.7% growth in Power+ Brands, and average selling price per case rose 2.2%. Carbonated Soft Drinks declined in both comparisons. Management attributed improved gross profit and margins to higher sales, product mix and lower raw-material costs; average cost per case decreased 7.2% in Q3 and 5.6% year to date.
Cash, liquidity and debt: Cash and equivalents were $105.7 million at January 28, 2017, essentially unchanged from April 30, 2016. Working capital was $152.9 million, up from $148.1 million; the current ratio was 3.0:1. The company had no borrowings under its $100 million unsecured revolving credit facilities, with $97.8 million available after $2.2 million reserved for letters of credit. It reported compliance with covenants and said available resources should meet liquidity and capital needs for the next 12 months. Nine-month capital expenditures were $11.8 million, versus $7.8 million a year earlier; management said the increase supported volume growth.
Material changes and notable items
- Gross margin expanded by 6.5 percentage points in Q3 and 5.6 points year to date. SG&A increased in dollars, mainly from distribution and marketing costs, but declined as a share of sales: 20.1% versus 21.9% in Q3 and 19.8% versus 20.8% year to date.
- Operating cash flow increased to $81.4 million from $49.8 million for the first nine months. Receivables were a use of cash; trade receivables rose $7.7 million, and days sales outstanding increased to 32.1 from 31.0.
- Cash used in financing included a $69.9 million special dividend, or $1.50 per share, paid January 27, 2017. The board also approved in concept an additional cash dividend before fiscal year-end, with the amount undetermined, and plans to develop a shareholder distribution program based on ownership duration.
- Interest expense was $139,000 year to date. Other income included $437,000 of interest income, compared with $50,000 in the prior-year period.
Outlook, risks and contingencies
No specific sales, earnings or margin guidance was provided. Management described a strategic focus on healthier hydration, product and flavor development, and growth of Power+ Brands. It noted that sales are seasonal, typically strongest in warmer months, and that results can be affected by raw-material and packaging costs, consumer preferences, competitive pricing, retailer support and weather. The filing reported no material changes in market risks or risk factors from the prior annual report.
The company used aluminum swaps to partially mitigate can-cost exposure. Their notional amount was $2.4 million, with a $336,000 fair-value asset; assuming unchanged commodity prices, management expected that unrealized gain to be recognized in earnings over the next 12 months. The company guaranteed up to $3.2 million of residual value on leased equipment terminating August 1, 2017, and expected no loss. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Power+ Brands, particularly sparkling waters, can sustain the reported volume and distribution growth, and how continued Carbonated Soft Drinks declines affect the mix.
- Whether favorable product mix and raw-material costs persist and support the recent gross-margin expansion.
- The timing and amount of any additional dividend or ownership-duration-based distribution program, and its effect on cash and investment capacity.
- Receivables collection, days sales outstanding, and the return on higher capital expenditures made to support volume growth.
- Potential changes in commodity costs, consumer demand, competition, retailer support and weather, as well as the outcome of the equipment residual-value guarantee.