Business context and reporting period
Natural Alternatives International, Inc. (NAI) filed this Form 10-K for the fiscal year ended June 30, 2018; the filing does not cover 2017 Q4. NAI manufactures private-label nutritional supplements and sells beta-alanine and licenses related patents and trademarks under the CarnoSyn and SR CarnoSyn brands. Its two reportable segments are contract manufacturing and beta-alanine sales/licensing.
Financial performance
Amounts below are in millions of dollars except per-share data. Fiscal 2017 is the comparable year.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $132.4 | $121.9 |
| Gross profit / margin | $26.3 / 19.9% | $26.2 / 21.5% |
| Operating income / margin | $9.5 / 7.2% | $9.7 / 8.0% |
| Net income / margin | $5.1 / 3.8% | $7.2 / 5.9% |
| Diluted EPS | $0.73 | $1.09 |
| Cash from operations | $1.8 | $14.1 |
| Capital expenditures | $4.1 | $5.4 |
Contract manufacturing sales rose 17% to $111.0 million; beta-alanine sales and licensing revenue fell 20% to $21.4 million. Cash and equivalents were $23.6 million at year-end, including $9.0 million held by the Swiss subsidiary. Current assets were $65.2 million and current liabilities $14.3 million. No credit-line borrowings or long-term debt were outstanding; $10.0 million remained available under the revolving facility, extended to February 2021. The company reported covenant compliance.
Material changes versus prior year
- Total sales increased 9%, driven by new and higher-volume manufacturing orders from existing customers, partly offset by discontinued U.S. customer relationships.
- Beta-alanine revenue declined amid lower shipments and average prices, softer sports-nutrition retail conditions, and generic competition. Reorders improved in the second half, and SR CarnoSyn sales continued to rise, but continuation is uncertain.
- Gross margin fell about 1.6 percentage points. Manufacturing margin improved modestly, while licensing-segment margin declined.
- Net income decreased 30%, primarily because income-tax expense rose to $5.6 million from $2.9 million. Operating cash flow fell sharply, with receivables and inventory using $6.2 million and $9.8 million of cash, respectively.
- Cash and equivalents declined $4.2 million to $23.6 million. Inventory rose to $23.6 million from $13.7 million, and accounts receivable rose to $14.6 million from $8.4 million.
Outlook, risks and unusual items
- Management anticipated positive net income in FY2019, without assurance, and expected the largest customer’s sales share to remain at 56%. Priorities include diversifying customers, expanding SR CarnoSyn commercialization, and improving efficiency and cost control.
- Customer concentration is substantial: Juice Plus represented 56% of FY2018 sales ($74.3 million); a second customer represented about 10%. The top three customers held 76.6% of gross receivables at year-end.
- The company incurred $2.9 million in patent litigation and compliance expenses in FY2018 and expected continued costs in FY2019. Several ordinary-course matters involved enforcement of intellectual-property rights; NAI reported no material pending legal proceeding as of September 18, 2018.
- Fifteen instant-release CarnoSyn patents expired in August 2017; remaining related patents begin expiring in 2023, while SR CarnoSyn patents extend through 2026. Patent challenges, generic competition, and the ability to establish demand for SR CarnoSyn are material uncertainties.
- Potential tariffs, limited suppliers and rising ingredient, labor and transportation costs could pressure supply, demand and margins. Two suppliers each accounted for at least 10% of FY2018 raw-material purchases.
- The Tax Cuts and Jobs Act generated $3.0 million in discrete tax expense: $1.7 million transition tax, $1.1 million estimated foreign withholding tax and $0.2 million deferred-tax remeasurement. The reported effective tax rate was 52.4%; management said its FY2018 tax accounting remained provisional during the measurement period. The transition tax is payable over eight years.
- A 500,000-share restricted stock award to Juice Plus under a five-year exclusive manufacturing arrangement generated $898,000 recorded as a reduction of revenue. At least 400,000 shares remained subject to forfeiture until at least August 2019.
- A $1.5 million trade receivable from customer Kaged Muscle was converted into a secured, interest-only note at 15% annual interest, due after 12 months. The filing reports $171,000 of FY2018 interest income on the note.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not attest to internal control over financial reporting; management concluded controls were effective.
Important facts for investors to verify
- Whether the concentrated Juice Plus relationship, including the exclusive manufacturing and restricted-share terms, is sustaining orders and collections.
- Whether FY2019 profitability and manufacturing growth can offset declining beta-alanine revenue and pressure on margins.
- Current status, cost and outcomes of patent litigation, and commercial adoption of SR CarnoSyn as instant-release patents expire.
- Collection status and credit protection for the $1.5 million Kaged Muscle note, alongside the sharp working-capital build in receivables and inventory.
- Final tax effects of the Tax Cuts and Jobs Act and any effects of tariffs or higher input costs on supply and profitability.