National Beverage Corp. — Form 10-K Summary
Reporting period: Fiscal year ended April 28, 2018 (52 weeks), compared primarily with the fiscal year ended April 29, 2017. This is an annual 10-K, not a standalone quarterly filing; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.
Business context
National Beverage develops, manufactures, markets and sells beverages, principally in the United States and Canada. Its portfolio includes LaCroix sparkling water, juices, energy drinks, and Shasta and Faygo carbonated soft drinks. Management emphasizes growth in its higher-margin “Power+” brands, product and flavor innovation, and a vertically integrated production network with 12 facilities. LaCroix was the principal growth brand.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $975.7 million | $826.9 million | Up 18.0% |
| Gross profit | $391.1 million | $326.1 million | Up 20.0% |
| Gross margin | 40.1% | 39.4% | Expanded 0.7 percentage points |
| SG&A | $186.9 million | $163.6 million | 19.2% of sales, versus 19.8% |
| Income before taxes | $205.5 million | $162.8 million | Up approximately 26% |
| Net income | $149.8 million | $107.0 million | Up approximately 40% |
| Diluted EPS | $3.19 | $2.29 | Up approximately 39% |
| Operating cash flow | $154.7 million | $114.3 million | Up $40.5 million |
| Capital expenditures | $32.0 million | $14.0 million | Higher investment to support capacity and volume |
| Cash and equivalents | $189.9 million | $136.4 million | At fiscal year-end |
| Working capital | $248.3 million | $181.1 million | Current ratio 3.4, versus 3.1 |
| Debt | No borrowings | No borrowings | $100 million revolving facilities; $97.9 million available |
Operating cash flow less capital expenditures was approximately $122.7 million in FY2018. Net sales rose mainly on a 19.8% increase in branded case volume and, to a lesser extent, higher average selling prices. Power+ volume increased 38.9%; branded carbonated soft drink volume declined 6.2%. Cost of sales per case rose 1.0%, primarily because of higher aluminum costs. SG&A increased in dollars due mainly to freight, volume-related costs and marketing.
Fourth quarter: FY2018 fourth-quarter net sales were $244.3 million, gross profit $99.4 million, net income $36.4 million and diluted EPS $0.78. For the comparable FY2017 quarter, these were $212.1 million, $85.9 million, $29.2 million and $0.62, respectively.
Material changes, outlook and commentary
- The company discontinued its lower-margin private-label carbonated soft drink business in the third quarter of FY2018, citing a focus on brand equity.
- Capital expenditures increased to $32.0 million; management expected FY2019 spending to increase further to support volume growth.
- The Tax Cuts and Jobs Act reduced the FY2018 effective tax rate to 27.1%, from 34.3%. FY2018 included a $4.3 million one-time reduction in tax expense from remeasuring deferred tax liabilities. The filing states the federal statutory rate would be 21% in subsequent fiscal years.
- The company paid a special dividend of $1.50 per share, totaling $69.9 million, during FY2018. It said it planned to develop a shareholder distribution program based on shareholding duration; the filing provides no detailed terms or timetable.
- Management believed existing capital resources would meet liquidity and capital needs for the next 12 months. It did not provide quantified revenue or earnings guidance.
Risks, contingencies and unusual items
- Key risks include intense competition from larger beverage companies, shifting consumer preferences and brand-image damage, customer concentration and retailer bargaining power, and the ability to sustain retailer support.
- Commodity and energy costs—including aluminum, resin, corn, packaging and juice—can fluctuate; passing cost increases to customers may be difficult. The company uses supplier agreements and aluminum derivatives to partially manage exposure.
- Weather, supply interruptions, regulation and potential taxes on sweetened beverages, and rising employee benefit costs could affect results.
- Aluminum swap contracts had a $37.5 million notional amount and a $6.2 million fair-value asset at year-end. Assuming commodity prices did not change, $6.2 million of unrealized pre-tax gains was expected to be reclassified into earnings over the next 12 months.
- Operating lease commitments totaled $28.4 million; purchase commitments totaled $15.9 million. The company reported ordinary-course litigation and did not expect it to have a material adverse effect. It also participates in multi-employer pension plans, including one reported in “red” zone status, which may entail withdrawal-liability exposure under specified circumstances.
- A related-party management agreement with Corporate Management Advisors, Inc., owned by the Chairman and CEO, generated FY2018 fees of $9.8 million, calculated under an agreement providing for a fee equal to 1% of consolidated net sales. The amount payable at year-end was $2.4 million.
Most important facts for investors to verify
- Whether LaCroix and other Power+ brands can sustain volume growth amid competition and changing consumer demand.
- Whether higher input, freight and marketing costs pressure gross margins or limit the company’s ability to pass through price increases.
- The return and timing of elevated capital spending, and the details and governance of the proposed shareholder distribution program.
- The effect of the lower federal tax rate on ongoing earnings, apart from FY2018’s one-time deferred-tax remeasurement benefit.
- The terms and oversight of the related-party management agreement, and potential exposure from multi-employer pension plans and self-insured claims.