National Beverage Corp. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended July 28, 2018; comparisons are with the three months ended July 29, 2017. The company develops, produces, markets and sells beverages, primarily in North America, including LaCroix and other sparkling waters, juices, energy drinks, and carbonated soft drinks. Amounts below are in millions except per-share data and percentages.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Net sales | $292.6 | $259.8 | +12.6% |
| Gross profit | $115.7 | $104.5 | +10.7% |
| Gross margin | 39.5% | 40.2% | Down 0.7 percentage points |
| SG&A | $52.7 | $46.7 | 18.0% of sales in both periods |
| Income before taxes | $63.8 | $58.0 | — |
| Income tax provision | $15.0 | $19.8 | Effective rate: 23.5% vs. 34.1% |
| Net income | $48.8 | $38.3 | +27.6% |
| Diluted EPS | $1.04 | $0.82 | — |
| Operating cash flow | $59.3 | $43.5 | — |
| Capital expenditures | $6.2 | $4.1 | — |
Liquidity, debt and cash flow
- Cash and equivalents were $243.0 at July 28, 2018, up from $189.9 at April 28, 2018. Cash increased $53.2 during the quarter; the prior-year quarter increase was $39.5.
- Working capital was $293.7, compared with $248.3 at fiscal year-end; the current ratio was 3.4. Operating cash flow primarily reflected net income and increased accrued and other liabilities, partly offset by higher receivables and inventory.
- No borrowings were outstanding under the $100.0 unsecured revolving facilities. After $2.1 reserved for standby letters of credit, $97.9 was available. The company reported compliance with covenants and said existing resources should meet requirements for the next 12 months.
- Interest expense was $0.05. The filing reports no outstanding debt borrowings; it does not state a separate total-debt figure.
Material changes and management commentary
- Sales rose primarily on 10.4% higher case volume and, to a lesser extent, higher average selling prices. Power+ Brands volume grew 29.1%, partly offset by declining carbonated soft drink volume. Average selling price per case rose 3.8%, reflecting product mix.
- Gross profit increased with volume and growth in higher-margin Power+ Brands, but gross margin declined. Cost of sales per case increased 2.1%, primarily due to higher aluminum and freight costs. SG&A rose primarily from distribution costs and marketing spending.
- The company discontinued its lower-margin private-label carbonated soft drink business in Q3 FY2018. Management expects FY2019 capital expenditures to increase, primarily to expand production capacity for volume growth. No specific revenue or earnings guidance was provided.
- The lower effective tax rate reflected the Tax Cuts and Jobs Act: the federal statutory rate was 21% for FY2019, versus 30.4% for FY2018. State taxes primarily explain the difference between the current effective and statutory rates.
- In Q1 FY2018, the company paid a $69.9 common-stock cash dividend; no dividend was recorded in the current quarter. Revenue recognition guidance adopted April 29, 2018 had no material financial-statement impact.
Risks, contingencies and unusual items
- Management identifies exposure to raw-material and packaging costs, including aluminum, freight, and the ability to pass cost increases to customers; consumer preferences, competition, retailer support, new product success, weather, seasonality, and execution are also risks.
- Aluminum swaps partially hedge can-cost exposure. At quarter-end, their notional amount was $26.3 and fair value was a $3.6 asset. Assuming commodity prices do not change, $3.6 of unrealized gains before tax was expected to be reclassified into earnings over the next 12 months. Hedge-related other comprehensive loss was $2.0 net of tax.
- The company anticipated that the lease accounting standard, effective for its fiscal year beginning April 28, 2019, would increase balance-sheet lease assets and liabilities; it was still evaluating the income-statement impact. No material changes to previously reported risk factors or market risks were disclosed.
Important facts for investors to verify
- Whether Power+ Brands volume growth and overall case-volume gains continue, and how the carbonated soft drink decline develops.
- Whether aluminum, freight and distribution-cost pressure affects gross margin, and whether pricing or mix can offset those costs.
- Whether planned capacity-related capital spending supports growth while preserving strong operating cash flow and liquidity.
- How much of earnings and future cost of sales depends on hedge gains, and how commodity prices affect those hedges.
- The comparability of quarterly results: management cautioned that seasonality, weather, promotional packaging and development projects can make quarter-to-quarter comparisons less informative.