Business Context and Reporting Period
Company: Natural Alternatives International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended December 31, 1995 (Fiscal Year 1996).
Business Overview: The Company operates through wholly-owned subsidiaries including Pro-Lean, Inc. and CellLife International, Inc., focusing on cosmetics, multi-level distribution, and weight loss products.
Key Financial Metrics
| Metric | 3 Months Ended Dec 31, 1995 |
6 Months Ended Dec 31, 1995 |
|---|---|---|
| Net Revenue | $11,753,954 | $22,107,755 |
| Gross Profit | $2,900,538 | $5,594,753 |
| Gross Margin | 24.7% | 25.3% |
| Operating Income | $1,215,376 | $2,192,046 |
| Net Earnings | $735,396 | $1,324,286 |
| Diluted EPS | $0.13 | $0.24 |
| Cash & Equivalents | $2,471,195 (as of Dec 31, 1995) | |
| Working Capital | ||
| Total Debt (Current + Long-term) | $1,122,498 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 69% for the quarter and 72% for the six-month period compared to the prior year, driven by sales to new and existing customers.
- Margin Compression: Gross margins declined from 27.3% to 24.7% (quarterly) and 28.1% to 25.3% (six-month) due to increased sales of lower-margin products.
- Profitability: Net earnings surged 204% for the quarter ($0.7M vs $0.2M) and 276% for the six months ($1.3M vs $0.4M), aided by operating leverage and reduced SG&A as a percentage of revenue (14.3% vs 20.7%).
- Balance Sheet: Inventory increased by $1.6M to $6.9M to meet manufacturing requirements, while accounts receivable decreased by $1.3M. Working capital improved to $9.5M from $8.2M.
Outlook, Risks, and Management Commentary
- Outlook: Management anticipates continued positive trends based on a strong backlog as of January 31, 1996, though no assurance is given.
- Liquidity: The Company maintains a $3.0M revolving line of credit (unused as of Dec 31, 1995) and sufficient internal cash flow to fund operations and growth.
- Capital Expenditures: The Company plans to acquire its current leased office and production facilities from principal stockholders for $545,000, funded via mortgage financing, expected to close in the third quarter.
- Customer Concentration Risk: Three customers accounted for 77% of revenue in the quarter and 69% in the six-month period. The loss of any major customer would have an adverse short-term impact.
- Legal: Various ordinary course legal claims exist, but management does not expect a material adverse impact.
Investor Verification Checklist
- Verify the sustainability of the 69% revenue growth rate given the shift toward lower-margin products.
- Assess the impact of customer concentration (77% of quarterly revenue from three customers) on future stability.
- Monitor the execution of the $545,000 facility acquisition and associated debt servicing.
- Review inventory levels ($6.9M) relative to sales velocity to ensure no obsolescence risks.
- Confirm the status of the $3.0M credit line availability for future liquidity needs.