Natural Alternatives International, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2013 (fiscal 2013 third quarter); filed May 14, 2013. The filing describes contract manufacturing of nutritional and health products, beta-alanine patent and trademark licensing, and branded supplements.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2012 periods.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $15.835 vs. $17.422; down 9% | $45.981 vs. $51.924; down 11% |
| Gross profit / margin | $2.778 / 17.5% vs. $4.123 / 23.7% | $8.281 / 18.0% vs. $12.159 / 23.4% |
| Operating income / margin | $0.569 / 3.6% vs. $1.630 / 9.4% | $1.325 / 2.9% vs. $5.203 / 10.0% |
| Net income / diluted EPS | $0.178 / $0.03 vs. $1.068 / $0.15 | $0.977 / $0.14 vs. $3.381 / $0.48 |
| Operating cash flow | Not separately provided | $2.042 provided vs. $2.395 used |
| Capital expenditures | Not separately provided | $1.354 vs. $1.759 |
- For the quarter, sales fell across all three segments: private-label contract manufacturing to $14.505 million (down 3%), patent and trademark licensing to $1.009 million (down 52%), and branded products to $0.321 million (down 17%). Nine-month segment sales were $41.773 million (down 10%), $3.207 million (down 23%), and $1.001 million (down 16%), respectively.
- Management attributed weaker manufacturing results chiefly to reduced volumes from existing customers, lower average prices on some higher-volume products, lower production levels, and lower average euro exchange rates. The lower licensing contribution reflected reduced royalty income and the absence of certain prior-year beta-alanine material sales and Abbott license fees.
- SG&A was $2.209 million for the quarter, down 11%; nine-month SG&A was $6.956 million, unchanged. Nine-month litigation and patent-compliance costs were approximately $1.8 million, versus $1.4 million in the prior-year period.
- The quarterly effective tax rate was 65.8%; the nine-month rate was 23.1%. The filing cites changes in annual income estimates and timing, state taxes, and lower-taxed foreign earnings as factors in tax-rate variation.
Financial position and liquidity
- At March 31, 2013, cash and cash equivalents were $14.638 million, total current assets $33.422 million, current liabilities $4.794 million, and working capital $28.628 million. The current ratio was approximately 7.0x.
- Total assets were $45.103 million, compared with $47.197 million at June 30, 2012. Stockholders’ equity was $40.009 million.
- The company reported no consolidated debt and no amounts drawn on its credit facilities. It had $5.5 million available under those facilities and was in compliance with Wells Fargo credit-agreement covenants. Cash and available credit totaled $14.6 million and $5.5 million, respectively; $6.4 million of cash and $0.526 million of available credit were held by the Swiss subsidiary.
- Cash increased $0.160 million over the nine-month period. Operating cash flow included $2.737 million from lower accounts receivable and was reduced by $1.725 million used for inventory. Inventory stood at $10.080 million, up from $8.355 million at June 30, 2012. Days sales outstanding were 44, versus 22 a year earlier.
- The company repurchased $0.596 million of stock during the first nine months. At quarter-end, $0.573 million remained available under the $2 million repurchase authorization.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expected the concentration of sales among its two largest manufacturing customers to decrease marginally during the rest of fiscal 2013, citing anticipated increases from other existing customers. It stated cash, operating cash flow, and potential borrowing capacity should cover working capital and capital expenditures for at least 12 months.
- Management’s stated priorities were to develop additional quality-oriented manufacturing customers, commercialize and protect the beta-alanine patent estate, grow the Pathway to Healing product line, and improve efficiency and cost management. The company did not anticipate material beta-alanine raw-material purchases and sales during the remainder of fiscal 2013; its beta-alanine raw-material inventory was zero at March 31.
- Customer concentration remains significant: the two largest customers represented 70% of private-label manufacturing sales for the nine months, down from 76%. The largest alone represented 53% in both periods. The company also depends on a limited number of suppliers for certain materials.
- Abbott may terminate its license and supply agreement through December 1, 2013. Further license fees and approximately $2.8 million of payments scheduled over four annual installments beginning in 2014 are conditional; the filing cautions there is no assurance the company will receive these amounts or future royalties.
- Patent litigation involving beta-alanine is ongoing, including proceedings with DNP and Woodbolt; the USPTO accepted requests to reexamine two patents. An adverse patent ruling could materially affect the business. The filing also describes two product-liability lawsuits in which the company says it did not manufacture, distribute, or sell the products at issue; one motion to dismiss was pending, and insurance or indemnification was being pursued.
- Foreign exchange movements affected results. The company had approximately $8.9 million of designated cash-flow hedges, with a $146,000 net asset fair value; it expected approximately $99,000 in accumulated gains to be reclassified into earnings over the next 12 months.
Important facts for investors to verify
- Whether manufacturing volumes and margins stabilize, and whether the anticipated sales diversification reduces customer concentration.
- Whether Abbott continues the agreement and makes the contingent payments, and how beta-alanine royalties develop.
- Progress and outcomes of patent challenges and product-liability cases, including potential costs, insurance coverage, and indemnification.
- Inventory needs, receivable collection trends, and the effect of currency movements on sales and margins.
- Whether the reported liquidity remains available in practice, including credit-facility conditions and restrictions or tax costs associated with repatriating foreign cash.