NATIONAL BEVERAGE CORP - Quarter Report: 2023 July (Form 10-Q)

NATIONAL BEVERAGE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

National Beverage Corp. develops, produces, markets and sells a distinctive portfolio of sparkling waters, juices, energy drinks and carbonated soft drinks primarily in the United States and Canada. 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.

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of National Beverage Corp. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated.

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all information and notes presented in the annual consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. The accounting policies used in these interim unaudited condensed consolidated financial statements are consistent with those used in the annual consolidated financial statements.

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the interim unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Results for the interim periods presented are not necessarily indicative of results which might be expected for the entire fiscal year.

Inventories

Inventories are stated at the lower of first-in, first-out cost or net realizable value. Inventories at July 29, 2023 were comprised of finished goods of $52.6 million and raw materials of $40.3 million. Inventories at April 29, 2023 were comprised of finished goods of $54.3 million and raw materials of $39.2 million.

Marketing Costs

The Company utilizes a variety of marketing programs, including cooperative advertising programs with customers, to advertise and promote its products to consumers. Marketing costs are expensed when incurred, except for prepaid advertising and production costs, which are expensed when the advertising takes place. Marketing costs, which are included in selling, general and administrative expenses, totaled $10.8 million for the three months ended July 29, 2023 and $10.3 million for the three months ended July 30, 2022.

Shipping and Handling Costs

Shipping and handling costs are reported in selling, general and administrative expenses in the accompanying condensed consolidated statements of income. Such costs totaled $20.9 million for the three months ended July 29, 2023 and $23.6 million for the three months ended July 30, 2022. Although our classification is consistent with many beverage companies, our gross margin may not be comparable to companies that include shipping and handling costs in cost of sales.

2. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Depreciation expense was $4.6 million for three months ended July 29, 2023, and $4.5 million for the three months ended July 30, 2022.

3. DEBT

At July 29, 2023, a subsidiary of the Company maintained unsecured revolving credit facilities with banks aggregating $100 million (the “Credit Facilities”). The Credit Facilities expire from October 28, 2024 to May 30, 2025 and any borrowings would currently bear interest at 1.05% above the Secured Overnight Financing Rate (SOFR). There were no borrowings outstanding under the Credit Facilities at July 29, 2023 or April 29, 2023. At July 29, 2023, $2.2 million of the Credit Facilities was reserved for standby letters of credit and $97.8 million was available for borrowings.

On December 21, 2021, a subsidiary of the Company entered into an unsecured revolving term loan facility with a national bank aggregating $50 million (the “Loan Facility”). There were no borrowings outstanding under the Loan Facility at July 29, 2023 or April 29, 2023. The Loan Facility expires December 31, 2023 and any borrowings would bear interest at .95% above the adjusted daily SOFR. 

The Credit Facilities and Loan Facility require the subsidiary to maintain certain financial ratios, including debt to net worth and debt to EBITDA (as defined in the credit agreements), and contain other restrictions, none of which are expected to have a material effect on our operations or financial position. At July 29, 2023, the subsidiary was in compliance with all loan covenants.

4. STOCK-BASED COMPENSATION

During the three months ended July 29, 2023, no options to purchase shares of common stock were exercised. At July 30, 2022, options to purchase 536,600 shares of common stock at a weighted average exercise price of $18.97 per share were outstanding and stock-based awards to purchase 5,387,005 shares of common stock were available for grant.

5. DERIVATIVE FINANCIAL INSTRUMENTS

From time to time, the Company enters into aluminum swap contracts to partially mitigate our exposure to changes in the cost of aluminum cans. Such financial instruments are designated and accounted for as cash flow hedges. Accordingly, gains or losses are reported in accumulated other comprehensive income (loss) (“AOCI”) and reclassified into cost of sales in the period in which the hedged transaction affects earnings. The following summarizes the gains (losses) recognized in the consolidated statements of Income and AOCI for the quarters ended July 29, 2023 and July 30, 2022:

As of July 29, 2023, the notional amount of our outstanding aluminum swap contracts was $49.5 million and, assuming no change in commodity prices, $4.9 million of unrealized loss before tax will be reclassified from AOCI and recognized in earnings over the next 12 months.

As of July 29, 2023, the fair value of the derivative liability was $4.9 million, which was included in accrued liabilities. At April 29, 2023, the fair value of the derivative liability was $4.6 million, which was included in accrued liabilities. Such valuation does not entail a significant amount of judgment and the inputs that are significant to the fair value measurement are Level 2 as defined by the fair value hierarchy as they are observable market based inputs or unobservable inputs that are corroborated by market data.

6. LEASES

The Company has entered into various non-cancelable operating lease agreements for certain of our offices, buildings, machinery and equipment expiring at various dates through July 2035. The Company does not assume renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Lease agreements generally do not contain material residual value guarantees or material restrictive covenants. Operating lease cost for the three months ended July 29, 2023 and July 30, 2022 was $3.7 million and $3.4 million, respectively.  As of July 29, 2023, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.40 years and 3.40%, respectively. As of April 29, 2023, the weighted-average remaining lease term and weighted average discount rate of operating leases was 4.34 years and 3.30%, respectively. Cash payments were $3.7 million for operating leases for the three months ended July 29, 2023 and $3.4 million for the three months ended July 30, 2022.

The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases as of July 29, 2023:

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, energy drinks (Power+ Brands) and, to a lesser extent, carbonated soft drinks. We believe our creative 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 than larger competitors who are burdened by legacy production and distribution complexity and costs.

The majority of our brands are geared to the active and health-conscious consumer including sparkling waters, energy drinks, and juices. Our portfolio of Power+ Brands includes LaCroix®, LaCroix Cúrate®, and LaCroix NiCola® sparkling water products; Clear Fruit® non-carbonated waters enhanced with fruit flavor; 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 130 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 options to expand distribution to other regions are 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 consisting of warehouse and direct-store delivery. The warehouse delivery system allows our retail partners to further maximize their assets by utilizing their ability to pick up product at our warehouses, further lowering their/our product costs.

Our operating results are affected by numerous factors, including fluctuations in the costs of raw materials, supply chain disruptions, holiday and seasonal programming and weather conditions. While prior years witnessed more seasonality, higher sales are realized during the summer when outdoor activities are more prevalent.

RESULTS OF OPERATIONS

Three Months Ended July 29, 2023 (first quarter of fiscal 2024) compared to

Three Months Ended July 30, 2022 (first quarter of fiscal 2023)

Net sales for the first quarter of fiscal 2024 increased 1.9% to $324.2 million from $318.1 million for the first quarter of fiscal 2023. The increase in sales resulted primarily from a 3.9% increase in average selling price per case partially offset by a 1.9% decrease in case volume. The volume declined for Power+ Brands, partially offset by increased volume of Carbonated Soft Drink brands.

Gross profit for the first quarter of fiscal 2024 increased to $114.5 million from $99.4 million for the first quarter of fiscal 2023. The increase in gross profit is due to the increase in average selling price and a decline in packaging and ingredient costs. Gross margin was 35.3% for the first quarter of fiscal 2024 and 31.2% for the first quarter of fiscal 2023.

Selling, general and administrative expenses for the first quarter of fiscal 2024 decreased $1.5 million to $51.4 million from $52.9 million for the first quarter of fiscal 2023. The decrease was primarily due to a decrease in shipping costs partially offset by increased selling and marketing costs. As a percent of net sales, selling, general and administrative expenses decreased to 15.8% for the first quarter of fiscal 2024 from 16.6% for the first quarter of fiscal 2023.

Other (income) expense - net includes interest income of $1.8 million for the first quarter of fiscal 2024 and $24,000 for the first quarter of fiscal 2023. The increase in interest income is due to increased average invested balances and higher yields.

The Company’s effective income tax rate, based upon estimated annual income tax rates, was 23.8% for the first quarter of fiscal 2024 and 23.6% for the first quarter of fiscal 2023. The difference between the effective rate and the federal statutory rate of 21% was primarily due to 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 July 29, 2023, we maintained $150 million unsecured revolving credit facilities, under which no borrowings were outstanding and $2.2 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.

Cash Flows

The Company’s cash position increased $64.7 million during the first quarter of fiscal 2024.

Net cash provided by operating activities for the first quarter of fiscal 2024 amounted to $70.1 million compared to $40.6 million for the first quarter of fiscal 2023. Net cash provided by operating activities for the first quarter of fiscal 2024 was principally provided by net income of $49.6 million, depreciation and amortization of $5.0 million, amortization of right to use assets of $3.3 million, deferred income taxes of $3.2 million and an increase in taxes payable of $8.7 million, offset in part by changes in working capital and other accounts.

Net cash used in investing activities for the first quarter of fiscal 2024 reflects capital expenditures of $5.5 million, compared to capital expenditures of $2.6 million for the first quarter of fiscal 2023. Certain production capacity and efficiency improvement projects are in progress and we anticipate fiscal 2024 capital expenditures will be in the range of $25 to $30 million. 

Financial Position

At July 29, 2023, our working capital increased to $274.6 million from $222.1 million at April 29, 2023. The current ratio was 2.8 to 1 at July 29, 2023 and 2.5 to 1 at April 29, 2023. Trade receivables increased $2.8 million and days sales outstanding improved to 30.2 from 33.6. Inventories decreased $.6 million and inventory turns improved to 8.2 times from 7.9 times

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 29, 2023.

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

National Beverage Corp. and its representatives may make written or oral statements relating to future events or results relative to our financial, operational and business performance, achievements, objectives and strategies. These statements are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 and include statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our stockholders. Certain statements including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “plans,” “expects,” and “estimates” constitute “forward-looking statements” and 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 and availability 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 demand and 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 report, filings with the Securities and Exchange Commission and other reports to our stockholders. 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 29, 2023.

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: September 7, 2023