NATIONAL BEVERAGE CORP - Quarter Report: 2019 January (Form 10-Q)

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended January 26, 2019

 

Commission file number 1-14170

 

NATIONAL BEVERAGE CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		59-2605822
(State of incorporation)		(I.R.S. Employer Identification No.)

 

8100 SW Tenth Street, Suite 4000, Fort Lauderdale, FL 33324

(Address of principal executive offices including zip code)

 

(954) 581-0922

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (✔) No (  )

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes (✔) No (  )

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (✔) Accelerated filer ( ) Non-accelerated filer (  ) Smaller reporting company (  ) Emerging growth company (  )

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (  )

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (  ) No (✔)

 

The number of shares of registrant’s common stock outstanding as of March 3, 2019 was 46,642,540.

 

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Table of Contents

 

NATIONAL BEVERAGE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

National Beverage Corp. develops, produces, markets and sells a diverse portfolio of flavored beverage products primarily in North America. Incorporated in Delaware in 1985, National Beverage Corp. is a holding company for various operating subsidiaries. When used in this report, the terms “we,” “us,” “our,” “Company” and “National Beverage” mean National Beverage Corp. and its subsidiaries.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

National Beverage Corp. innovatively refreshes America with a distinctive portfolio of sparkling waters, juices and, to a lesser degree, energy drinks. Over the past few years, our carbonated soft drink brands continue to be modified as we endeavor to make them more adaptable to our consumers. We believe our ingenious product designs, innovative packaging and imaginative flavors, along with our corporate culture and philosophy, make National Beverage unique as a stand-alone entity in the beverage industry. 

Our strategy seeks the profitable growth of our products by (i) developing healthier beverages in response to the global shift in consumer buying habits and tailoring our beverage portfolio to the preferences of a diverse mix of ‘crossover consumers’ – a growing group desiring a healthier alternative to artificially sweetened and high-caloric beverages; (ii) emphasizing unique flavor development and variety throughout our brands that appeal to multiple demographic groups; (iii) maintaining points of difference through innovative marketing, packaging and consumer engagement and (iv) responding faster and more creatively to changing consumer trends that larger competitors who are burdened by legacy production, distribution complexity and costs cannot quickly comply with.

Our brands consist of beverages geared to the active and health-conscious consumer (“Power+ Brands”) including sparkling waters, energy drinks, and juices. Our portfolio of Power+ Brands includes LaCroix®, LaCroix Cúrate®, LaCroix NiCola® and Shasta® Sparkling Water products; Rip It® energy drinks and shots; and Everfresh®, Everfresh Premier Varietals™ and Mr. Pure® 100% juice and juice-based products. Additionally, we produce and distribute carbonated soft drinks including Shasta® and Faygo®, iconic brands whose consumer loyalty spans more than 125 years.

Presently, our primary market focus is the United States and Canada. Certain of our products are also distributed on a limited basis in other countries and expanding distribution to other regions is being considered. To service a diverse customer base that includes numerous national retailers, as well as thousands of smaller “up-and-down-the-street” accounts, we utilize a hybrid distribution system to deliver our products primarily through the warehouse delivery system and distributors.

National Beverage Corp. is incorporated in Delaware and began trading as a public company on the NASDAQ Stock Market in 1991. In this report, the terms “we,” “us,” “our,” “Company” and “National Beverage” mean National Beverage Corp. and its subsidiaries unless indicated otherwise.

Our operating results are affected by numerous factors, including fluctuations in the costs of raw materials, holiday and seasonal programming and weather conditions. While yesteryear we witnessed more seasonality, we continue to see higher sales during the summer when outdoor activities are more prevalent.

Our highly innovative business, where new beverages are developed and produced for selective holidays and ceremonial dates, should not be analyzed on the common three-month (quarterly) periods, traditionally found acceptable. Today, costly development projects and seasonal weather periods plus promotional packaging, make quarter-to-quarter comparisons unworthy statistics and forcing companies into decision making for that purpose is not truly beneficial for investors and shareholders alike.

Traditional and typical are not a part of an innovator’s vocabulary.

RESULTS OF OPERATIONS

Three Months Ended January 26, 2019 (third quarter of fiscal 2019) compared to Three Months Ended January 27, 2018 (third quarter of fiscal 2018)

Net sales for the third quarter of fiscal 2019 decreased 2.8% to $220.9 million compared to $227.5 million for the third quarter of fiscal 2018. The decrease in sales resulted primarily from a 4.1% decline in branded case volume partially offset by a higher average selling price. The volume decrease includes a 5.8% decline in volume of Power+ Brands and flat volume of Carbonated Soft Drinks. Management believes the decline in Power+ Brands is principally due to widespread media coverage of litigation regarding the marketing and labeling of LaCroix. (See Footnote 7.) The net sales decline also reflects the discontinuance of lower-margin, private-label carbonated soft drink business in the third quarter of Fiscal 2018.   Average selling price per case increased 3.7% due to pricing increases and changes in product mix.

Gross profit for the third quarter of fiscal 2019 decreased 11.7% to $80.5 million compared to $91.2 million for the third quarter of fiscal 2018. The decrease in gross profit is due to the decline in volume primarily in the November period. Cost of sales per case increased 9.7% primarily due to higher  manufacturing fixed costs,  aluminum, and freight costs. Gross margin was 36.5% compared to 40.1% for the third quarter of fiscal 2018.

Selling, general and administrative expenses for the third quarter of fiscal 2019 increased $4.1 million to $49.5 million from $45.4 million for the third quarter of fiscal 2018. The increase was primarily due to increased marketing investment including the expansion of MerchMx resources focused on retailer execution and higher distribution costs.  As a percent of net sales, selling, general and administrative expenses increased to 22.4% from 20.0%.

Other income - net includes interest income of $1.2 million for the third quarter of fiscal 2019 and $402 thousand for the third quarter of fiscal 2018. The increase in interest income is due to increased invested balances and returns on investments.

The Tax Cuts and Jobs Act (“the Tax Act”) which was signed into law on December 22, 2017 reduced the applicable federal statutory rate from 35% to 21% effective January 1, 2018.  The Company’s effective income tax rate, based upon estimated annual income tax rates, was 23% for the third quarter of fiscal 2019. The difference between the effective rate and the federal statutory rate of 21% was primarily due to the effects of state income taxes.

The federal statutory rate for fiscal 2018 was 30.4%.  The Company’s effective tax rate was 10.9% for the third quarter of fiscal 2018 which includes a one-time adjustment to remeasure previous deferred tax liabilities of $4.3 million and adjust prior year-to-date income tax to the estimated effective tax rate for the full year resulting in a $7 million reduction in tax expense in that quarter.

Nine Months Ended January 26, 2019 (first nine months of fiscal 2019) compared to Nine Months Ended January 27, 2018 (first nine months of fiscal 2018)

Net sales for the first nine months of fiscal 2019 increased 5.8% to $774.2 million compared to $731.4 million for the nine months of fiscal 2018. The increase in sales resulted primarily from a 7.9% increase in branded case volume and, to a lesser extent, a higher average selling price. The volume increase includes 13.5% growth in volume of Power+ Brands, partially offset by a decline in volume of Carbonated Soft Drinks.  Net sales reflect the discontinuance of lower-margin, private-label carbonated soft drink business in the third quarter of Fiscal 2018.  Average selling price per case increased 3.4% due to pricing increases and changes in product mix.

Gross profit for the first nine months of fiscal 2019 increased 2.7% to $299.8 million compared to $291.8 million for the first nine months of fiscal 2018. The increase in gross profit is due to increased volume and growth in higher margin Power+ Brands. Cost of sales per case increased 5.4% primarily due to higher aluminum, fixed manufacturing and freight costs. As a result, gross margin declined to 38.7% compared to 39.9% for the first nine months of fiscal 2018.

Selling, general and administrative expenses for the first nine months of fiscal 2019 increased $16.0 million to $153.6 million from $137.6 million for the first nine months of fiscal 2018. The increase was primarily due to distribution and marketing spending. As a percent of net sales, selling, general and administrative expenses increased to 19.8% from 18.8%.

Other income - net includes interest income of $3.3 million for the first nine months of fiscal 2019 and $998 thousand for the first nine months of fiscal 2018. The increase in interest income is due to increased invested balances and returns on investments.

The Tax Act which was signed into law on December 22, 2017 reduced the applicable federal statutory rate from 35% to 21% effective January 1, 2018.  The Company’s effective income tax rate, based upon estimated annual income tax rates, was 23.2% for the first nine months of fiscal 2019 and 26.9% for the first nine months of fiscal 2018. The difference between the effective rate and the federal statutory rate of 21% was primarily due to the effects of state income taxes.

The federal statutory rate for fiscal 2018 was 30.4%.  The Company’s effective tax rate was 26.9% for the first nine months of fiscal 2018, which includes a one-time adjustment to remeasure previous deferred tax liabilities of $4.3 million. The difference between the effective tax rate in 2018 and the federal statutory rate of 30.4% relates primarily to the remeasurement of deferred taxes and the effects of state income taxes.

LIQUIDITY AND FINANCIAL CONDITION

Liquidity and Capital Resources

Our principal source of funds is cash generated from operations. At January 26, 2019, we maintained $100 million unsecured revolving credit facilities, under which no borrowings were outstanding and $2.1 million was reserved for standby letters of credit. We believe existing capital resources will be sufficient to meet our liquidity and capital requirements for the next twelve months.

On November 20, 2018, the Company declared a special cash dividend of $2.90 per share payable to shareholders of record on November 30, 2018. The cash dividend totaling $135.2 million was paid on January 29, 2019.    

Cash Flows

The Company’s cash position increased $19.9 million for the third quarter of fiscal 2019, which compares to an increase of $26.2 million for the third quarter of fiscal 2018.

Net cash provided by operating activities for the first nine months of fiscal 2019 amounted to $107.0 million compared to $106.8 million for the first nine months of fiscal 2018. For the first nine months of fiscal 2019, cash flow was principally provided by net income of $114.7 million, a decrease in accounts receivable of $8.0 million and depreciation and amortization aggregating $11.5 million, offset in part by increases in inventory and decreases in accounts payable and accruals.

Net cash used in investing activities for the first nine months of fiscal 2019 reflects capital expenditures of $27.5 million compared to capital expenditures of $18.7 million for the first nine months of fiscal 2018. The Company expects increased capital expenditures primarily to expand production capacity.   

Financial Position

During the first nine months of fiscal 2019, our working capital decreased to $206.5 million from $248.3 million at April 28, 2018. The decrease in working capital was due to the accrual of $135.2 million cash dividends declared in November 2018 and lower trade receivables, partially offset by higher cash and inventory. Trade receivables declined, with days sales outstanding flat at 31.4 days. Inventories increased $11.2 million in anticipation of future sales growth. Inventory turns declined to 7.8 from 9.5 times. At January 26, 2019, the current ratio was to 1.9 to 1 compared to 3.4 to 1 at April 29, 2018, primarily due to the effect of the accrued cash dividend.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended April 28, 2018.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective to ensure information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q (the “Form 10-Q”) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risk, uncertainties and other factors that may cause the actual results, performance or achievements of our Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: general economic and business conditions, pricing of competitive products, success of new product and flavor introductions, fluctuations in the costs of raw materials and packaging supplies, ability to pass along cost increases to our customers, labor strikes or work stoppages or other interruptions in the employment of labor, continued retailer support for our products, changes in brand image, consumer preferences and our success in creating products geared toward consumers’ tastes, success in implementing business strategies, changes in business strategy or development plans, government regulations, taxes or fees imposed on the sale of our products, unfavorable weather conditions and other factors referenced in this Form 10-Q. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained in our Annual Report on Form 10-K for the fiscal year ended April 28, 2018 and other filings with the Securities and Exchange Commission. We disclaim an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments.

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in risk factors from those reported in our Annual Report on Form 10-K for the fiscal year ended April 28, 2018.

ITEM 6. EXHIBITS

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: March 7, 2019

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