Natural Alternatives International, Inc. — Form 10-Q summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2019, the third quarter of fiscal 2019. The request metadata’s “2018 Q3” does not match the filing period.
Business context and results
NAI provides private-label contract manufacturing of nutritional and health products and sells beta-alanine raw materials and licenses related patents and trademarks, including CarnoSyn and SR CarnoSyn. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Net sales | $35.5 million, up 11% | $108.0 million, up 16% |
| Gross profit / margin | $6.3 million / 17.8%; prior-year margin 21.1% | $19.9 million / 18.4%; prior-year margin 21.1% |
| Operating income / margin | $1.8 million / 5.2%; down 27% | $6.8 million / 6.3%; up 1% |
| Net income | $2.0 million; down 3% | $6.7 million; up 211% |
| Diluted earnings per share | $0.27, versus $0.30 | $0.95, versus $0.32 |
| Operating cash flow | Not presented separately for the quarter | $7.6 million, versus $4.7 million |
Private-label manufacturing sales rose 24% for the quarter and 22% year to date, supported by new products and higher volumes. Patent and trademark licensing sales fell 40% and 15%, respectively, primarily due to lower beta-alanine shipments, market and seasonal factors, and lower average selling prices. NAI said some customers had shifted to generic beta-alanine. The year-to-date net income increase chiefly reflects the prior-year period’s tax expense, including $3.3 million of discrete Tax Act items; it does not reflect comparable growth in operating income.
Cash, liquidity, debt, and capital
- At March 31, 2019, cash and cash equivalents were $27.7 million, current assets $76.3 million, and current liabilities $18.2 million.
- Operating cash flow of $7.6 million was offset by $2.6 million of investing outflows and $0.9 million of financing outflows. Capital expenditures were $4.1 million; the company also collected a $1.5 million note receivable.
- NAI had no outstanding borrowings or long-term debt and reported $10.0 million available under its credit facilities. It was in compliance with credit covenants. Management believes cash and expected operating cash flows are sufficient for working capital and capital expenditures for at least 12 months.
- Total assets were $98.5 million, compared with $85.2 million at June 30, 2018. Inventory increased to $27.0 million from $23.6 million; accounts receivable rose to $16.8 million from $14.6 million. Days sales outstanding increased to 40 from 29 year over year.
- The company repurchased $0.9 million of stock during the nine months, including employee tax-withholding share returns. It reported 7.26 million common shares outstanding, net of treasury shares, as of May 9, 2019.
Material changes, outlook, and risks
- Juice Plus+ agreement: On March 31, NAI extended its exclusive manufacturing agreement through August 6, 2025. Juice Plus+ returned 400,000 restricted shares in exchange for an annual cash sales discount. NAI recorded a one-time $408,000 income adjustment in the quarter related to the returned shares; the new cash discount begins in fiscal Q4 and will be recorded over the extended agreement term.
- Beta-alanine developments: NAI reported FDA New Dietary Ingredient status for CarnoSyn in February 2019, a favorable March 2019 Federal Circuit ruling on patent eligibility, and Japanese approval of beta-alanine for food markets. Management intends to pursue commercialization and intellectual-property enforcement, but cautioned these efforts may not reverse or slow sales declines.
- Concentration and supply risks: The largest customer represented 54% of nine-month sales, slightly above 53% in the prior-year period. The three largest customers represented 78% of gross receivables. NAI also relies on a limited number of suppliers for certain raw materials, including beta-alanine; supplier loss could materially affect results.
- Margins and spending: Consolidated gross margin declined year over year, as improved contract-manufacturing margins were more than offset by weaker licensing margins. NAI reported $1.6 million in litigation and patent-compliance expenses for the first nine months, down from $2.4 million in the prior-year period.
- Hedging and foreign exchange: Cash-flow hedge contracts had a $3.4 million net fair-value asset and approximately $58 million notional value at March 31; $1.6 million of gains was expected to be reclassified into earnings over the next 12 months. NAI partially terminated contracts after some forecast sales were no longer considered probable.
- Guidance: No numerical earnings or revenue guidance was provided. Management’s stated priorities are growing manufacturing relationships, commercializing beta-alanine products and intellectual property, and improving operating efficiency and cost management.
- Other items: Management considered disclosure controls effective. NAI described ordinary-course legal matters, including intellectual-property enforcement, and said it did not expect them to have a material adverse effect based on information available, while acknowledging uncertain outcomes and potentially higher costs. Adoption of lease accounting in fiscal 2020 is expected to materially increase balance-sheet lease assets and liabilities.
Important facts for investors to verify
- Whether manufacturing sales growth persists and customer concentration declines as management anticipates.
- Whether CarnoSyn sales stabilize or improve, and the commercial and legal impact of the FDA status, court ruling, and Japanese market approval.
- How the Juice Plus+ cash discount affects net sales and margins beginning in fiscal Q4 and over the extended agreement term.
- Whether lower gross margins, higher receivable days, and inventory growth affect cash conversion and liquidity.
- The timing and earnings impact of hedge reclassifications, patent-enforcement costs, and the forthcoming lease-accounting adoption.