National Beverage Corp. — Form 10-Q Summary
Business context and period: The company develops, produces, markets, and sells beverages, primarily in North America. Its portfolio includes LaCroix and other sparkling waters, juices, energy drinks, and Shasta and Faygo soft drinks. This report covers the 13 and 26 weeks ended October 28, 2017 (fiscal Q2 and first half of fiscal 2018), compared with periods ended October 29, 2016. Beverage sales are seasonal, typically strongest in warmer months.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $244.1 million, up 20.1% | $504.0 million, up 19.9% |
| Gross profit / margin | $96.1 million / 39.4%, versus $78.7 million / 38.7% | $200.6 million / 39.8%, versus $164.2 million / 39.1% |
| SG&A | $45.4 million; 18.6% of sales, versus 20.4% | $92.1 million; 18.3% of sales, versus 19.7% |
| Net income | $34.0 million, versus $24.6 million | $72.3 million, versus $53.6 million |
| Diluted EPS | $0.72, versus $0.53 | $1.54, versus $1.15 |
For the quarter, case volume rose 17.7%, including 41.0% growth in Power+ Brands, partly offset by declining Carbonated Soft Drinks. Average selling price per case increased 1.4%. For the first half, case volume rose 16.2%, including 39.3% Power+ growth, and average selling price per case increased 2.0%. Management attributed improved gross margin to higher volume and the greater contribution of higher-margin Power+ products; cost of sales per case was flat. Higher volume also helped SG&A fall as a percentage of sales despite increased distribution, selling, marketing, and administrative costs.
Cash, liquidity, and debt
- First-half operating cash flow was $72.3 million, versus $53.3 million a year earlier. Capital expenditures were $10.3 million, versus $8.5 million; investing cash outflow was $10.3 million.
- Cash declined $7.5 million during the half to $128.8 million, primarily reflecting the $69.9 million special dividend. Financing cash outflow was $69.6 million.
- At October 28, 2017, current assets were $279.9 million and current liabilities were $96.8 million; working capital was $183.1 million and the current ratio was 2.9:1, versus 3.1:1 at April 29, 2017. Management attributed the lower ratio primarily to the dividend.
- No borrowings were outstanding under the $100 million unsecured revolving credit facilities; $97.8 million was available after $2.2 million reserved for standby letters of credit. The company reported covenant compliance and said resources should meet liquidity and capital needs for the next 12 months.
- Trade receivables rose $9.0 million and inventories rose $6.4 million from April 29, reflecting higher sales and inventory maintained to support growth. Days sales outstanding improved to 29.9 from 30.6; inventory turns improved to 9.9 from 9.5.
Material changes, outlook, and risks
- The $1.50-per-share special cash dividend, totaling $69.9 million, was declared in May and paid August 4, 2017. No dividend payment was reported for the comparable prior-year period.
- The effective tax rate was 33.3% for the quarter and 33.7% for the half, down from 34.2% in both comparable periods. Adoption of share-based compensation accounting guidance reduced income tax expense by $480,000 for the quarter and $561,000 for the half.
- Aluminum swap contracts had a $42.6 million notional amount. Assuming commodity prices do not change, the company expected to reclassify $3.1 million of unrealized gains before tax from accumulated other comprehensive income into earnings over the next 12 months.
- No specific sales or earnings guidance was provided. Management described a strategic focus on healthier hydration, product variety and flavors, and efficient production and distribution. It cited raw-material costs, consumer preferences, competitive pricing, and weather as factors affecting results.
- Other identified risks include the ability to pass through cost increases, retailer support, product and brand acceptance, new-product success, labor interruptions, regulation, and taxes or fees. The filing reported no material changes in risk factors or market risks versus the prior Form 10-K. A $1.7 million residual-value guarantee on leased equipment runs to August 1, 2019; management did not expect a loss.
- Management concluded disclosure controls were effective and reported no materially affecting changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong growth in Power+ Brands continues and offsets declines in Carbonated Soft Drinks.
- Whether volume growth and product mix continue to support gross-margin improvement, particularly if input costs change.
- How working capital, receivables, and inventory evolve as sales expand, and whether operating cash flow remains strong after capital spending and shareholder distributions.
- The effects of the special dividend on cash and future capital allocation, and the company’s continued access to its revolving facilities and compliance with covenants.
- The timing and earnings impact of reclassifying hedge gains, and the eventual effects of pending accounting standards. The filing said revenue-standard adoption was not expected to have a material impact; lease and hedge-accounting changes were still under evaluation.