National Beverage Corp. — FY2014 Form 10-K
Business context and reporting period. National Beverage develops, manufactures, markets and sells flavored beverages, including LaCroix sparkling water, Rip It energy drinks, Everfresh juices, and Shasta and Faygo soft drinks. The filing covers the fiscal year ended May 3, 2014; FY2014 included 53 weeks, and its fourth quarter included 14 weeks. The company reports as one operating segment.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $641.1 million | $662.0 million |
| Gross profit / gross margin | $217.7 million / 33.9% | $217.3 million / 32.8% |
| SG&A | $153.2 million | $146.2 million |
| Income before taxes | $63.1 million | $70.5 million |
| Net income | $43.6 million | $46.9 million |
| Diluted EPS | $0.92 | $1.01 |
| Cash from operations | $52.4 million | $40.3 million |
| Capital expenditures | $12.1 million | $9.7 million |
Margins and sales drivers. Gross margin improved 1.1 percentage points, attributed mainly to favorable product mix and lower raw-material costs. Cost of sales per case declined 1.7%. Net sales fell 3.2%; carbonated soft-drink volume declined 7.5%, principally due to unfavorable weather and industry consumption declines, while Power+ Brands volume grew 8.2%. Average net selling price per case was approximately unchanged. SG&A rose, primarily from higher advertising costs. The reported effective tax rate was 30.9%, including a benefit from resolving certain tax matters.
Liquidity and debt. At May 3, 2014, cash was $29.9 million, working capital $78.6 million, and the current ratio 2.2:1. Long-term debt was $30.0 million, down from $50.0 million a year earlier. The company had $100 million of unsecured revolving facilities, with $30 million drawn, $2.2 million supporting letters of credit, and $67.8 million available. It reported compliance with loan covenants. Operating cash flow increased by $12.1 million, mainly due to working-capital changes; financing cash outflow included $20 million of debt repayment and an $8 million preferred-stock redemption.
Material changes and notable items
- Revenue and net income declined year over year despite higher gross profit, as SG&A, interest and other expenses increased.
- Fourth-quarter sales were $164.3 million and net income $11.9 million, versus $167.9 million and $12.1 million, respectively, in FY2013. FY2014 Q4 had 14 weeks, compared with 13 weeks in other quarters.
- Capital spending was $12.1 million; management reported no material capital expenditure commitments.
- The company redeemed 160,000 of 400,000 Series D preferred shares for $8 million. At year-end, 240,000 shares remained, with a $12 million aggregate liquidation preference.
- In April 2014, the company reached an agreement with the IRS concerning three years of returns; no material adjustments were proposed. The resolution reduced unrecognized tax benefits and contributed to the lower reported tax rate.
- Related-party management fees to Corporate Management Advisors, owned by the Chairman and CEO, were $6.4 million for FY2014; $1.6 million was payable at year-end.
Outlook, risks and contingencies
Management stated that existing capital resources should meet liquidity and capital requirements for the next 12 months, but provided no specific revenue or earnings guidance. Strategy emphasizes growing health-oriented and functional beverages, innovative flavors and packaging, regional brands, and value-focused products.
Key risks include shifting consumer preferences, intense competition, retailer bargaining power, commodity and energy cost volatility, limits on passing costs through to customers, weather and seasonality, regulation and potential beverage taxes, and employee benefit costs. The company uses supplier agreements and commodity derivatives to partially mitigate certain input-cost exposure; it does not hedge interest-rate risk. A 100-basis-point change in rates would have changed FY2014 interest expense by approximately $400,000.
Contractual obligations totaled $82.4 million, including $30.0 million of debt, $19.5 million of operating leases and $32.8 million of purchase commitments. The company also guaranteed up to $5.3 million of leased-equipment residual value and expected no loss. Ordinary-course litigation was not expected to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Power+ Brands growth can continue and offset declines in carbonated soft-drink volume.
- Whether gross-margin gains persist as commodity costs, promotions and product mix change.
- The composition and availability of revolving credit, covenant headroom, and debt repayment requirements.
- The sustainability of earnings excluding the tax benefit from the IRS resolution.
- The terms and governance of the related-party management agreement and the remaining preferred-stock obligations.
- Exposure to pension-plan underfunding or withdrawal liability, commodity commitments, and the equipment residual-value guarantee.