Business context and reporting period
National Beverage Corp. develops, produces, markets and sells beverages, primarily in the U.S. and Canada, including LaCroix sparkling water, energy drinks, juices and carbonated soft drinks. This unaudited Form 10-Q covers the quarter ended October 26, 2019 (second quarter of fiscal 2020) and the six months then ended; comparisons are with the periods ended October 27, 2018.
Financial results and position
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Quarter 2019 | Quarter 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $251.6 | $260.7 | $515.2 | $553.3 |
| Gross profit | $92.8 | $103.5 | $189.4 | $219.2 |
| Gross margin | 36.9% | 39.7% | 36.8% | 39.6% |
| Net income | $32.7 | $41.1 | $67.2 | $89.9 |
| Diluted EPS | $0.70 | $0.88 | $1.43 | $1.92 |
| SG&A | $51.2 | $51.4 | $103.2 | $104.1 |
- For the six months, operating cash flow was $87.2 million, capital expenditures were $9.6 million, and cash increased $77.7 million to $233.9 million. Prior-year figures were $76.2 million, $16.3 million and a $60.2 million cash increase, respectively.
- At October 26, 2019, current assets were $384.6 million and current liabilities $108.1 million; working capital was $276.4 million and the current ratio was 3.6:1. Total assets were $566.8 million and shareholders’ equity was $399.5 million.
- No borrowings were outstanding under the $100 million unsecured revolving facilities; $96.8 million was available after $3.2 million reserved for standby letters of credit. The company reported covenant compliance.
- Operating lease liabilities totaled $49.5 million ($14.3 million current), with $49.6 million of right-of-use assets. There were no other borrowings reported.
Material changes versus prior comparable periods
- Quarterly sales fell 3.5%; case volume declined 1.9% and average selling price fell 1.1%. Power+ Brands volume declined 5.2%, partly offset by 5.3% growth in carbonated soft drinks.
- For the six months, sales declined 6.9%, driven primarily by a 6.6% case-volume decline. Power+ Brands volume fell 11.2%, partly offset by 4.4% growth in carbonated soft drinks. Average selling price per case declined 0.3%.
- Management attributed lower gross profit to reduced volume and higher manufacturing costs. Cost of sales per case increased 3.6% for the quarter and 4.4% for the six months; gross margin contracted 2.8 percentage points in both comparisons.
- Net income declined approximately 20% for the quarter and 25% for the six months. SG&A dollars edged lower, but SG&A as a share of sales increased to 20.3% for the quarter and 20.0% for the six months.
- Operating cash flow improved year over year, supported by net income, lower receivables and depreciation and amortization; capital spending was lower.
Outlook, commentary and risks
- Management said existing capital resources should meet liquidity and capital needs for the next 12 months. It planned to continue production-capacity and efficiency projects in fiscal 2020 and expected capital expenditures to decline from fiscal 2019 levels; no specific full-year sales or earnings guidance was provided.
- Management cited increased competition in sparkling water as a primary factor in Power+ Brands’ volume decline and noted that competition and product mix affected average price per case. Strategy emphasizes healthier beverages, product and flavor innovation, marketing and adapting to consumer trends.
- Risk factors identified include competition and pricing, consumer preferences and brand image, new-product success, raw-material and packaging costs, ability to pass cost increases to customers, retailer support, labor interruptions, regulation, taxes, weather and seasonality. The company reported no material changes from its prior annual report in risk factors or market risks.
- The company adopted lease accounting guidance on April 28, 2019, recognizing lease assets and liabilities; it said adoption did not change income statements, retained earnings or cash flows. Aluminum swaps hedge input-cost exposure: the $20.1 million notional position had $1.5 million of unrealized pre-tax losses expected to be reclassified to earnings over the next 12 months, assuming commodity prices do not change.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Power+ Brands’ volume declines—particularly in sparkling water—persist, and whether carbonated soft-drink growth continues to offset them.
- Whether higher manufacturing costs and lower gross margins stabilize or continue to pressure earnings.
- How sales volume, pricing and product mix develop, given the six-month revenue and earnings declines.
- Planned fiscal 2020 capital expenditures and the pace of production-capacity and efficiency projects; the filing gives no specific spending forecast.
- Cash generation, available revolving-credit capacity, lease obligations and the future earnings impact of aluminum hedges.