Natural Alternatives International, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 30, 2019; comparisons are with fiscal 2018. This is an annual filing, not a standalone fourth-quarter report. NAI manufactures private-label nutritional supplements and sells and licenses beta-alanine under its CarnoSyn and SR CarnoSyn brands.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $138.3 million | $132.4 million |
| Gross profit / margin | $23.6 million / 17% | $26.3 million / 20% |
| Operating income | $6.0 million | $9.5 million |
| Net income | $6.5 million | $5.1 million |
| Diluted EPS | $0.92 | $0.73 |
| Cash from operating activities | $6.6 million | $1.8 million |
| Capital expenditures | $5.3 million | $4.1 million |
Private-label manufacturing sales rose 10% to $121.6 million, while patent and trademark licensing and beta-alanine sales fell 22% to $16.7 million. Operating income declined 37%; gross margin fell 2.8 percentage points, reflecting weaker beta-alanine economics and a $686,000 reserve/write-off for obsolete first-generation SR CarnoSyn powder. Net income increased despite lower operating income, mainly because income tax expense declined to $1.4 million from $5.6 million; FY2018 included $3.0 million of discrete Tax Act items. FY2019 effective tax rate was 17.8%.
At year-end, cash and cash equivalents were $25.0 million, current assets $71.4 million, current liabilities $14.3 million, total assets $93.5 million, and stockholders’ equity $76.1 million. The company had no borrowings outstanding and had $10.0 million available on its credit line. Operating cash flow improved, although receivables and inventory still used cash. Cash used for investing was $3.8 million and for financing was $1.3 million, including share repurchases.
Business developments and material changes
- Sales increased 4% overall, driven by new products and higher manufacturing volumes, partly offset by reduced European customer demand.
- The largest customer represented 49% of sales, down from 56% in FY2018; a second customer represented 19%. The two together accounted for 68% of FY2019 sales.
- CarnoSyn revenue declined amid lower shipments and average selling prices, seasonal and market factors, and some customers switching to generic beta-alanine.
- NAI received FDA New Dietary Ingredient status for patented CarnoSyn in February 2019 and a favorable Federal Circuit ruling on patent eligibility in March. Japan approved beta-alanine for food products in March; NAI shipped initial orders under an exclusive distribution arrangement in the fourth quarter.
- NAI amended its Juice Plus+ manufacturing agreement, extending it through August 2025. Juice Plus+ returned 400,000 restricted shares in exchange for an annual cash sales discount.
- Cash flow hedges had a $39.9 million notional amount at year-end. The company reported a net derivative asset of approximately $2.3 million and expects $933,000 of gross hedge gains to be reclassified into earnings over the next 12 months.
Outlook, risks and unusual items
For FY2020, management expects low- to mid-single-digit growth in private-label manufacturing sales and mid- to high-single-digit growth in CarnoSyn and SR CarnoSyn revenue. It expects sales to the largest manufacturing customer to be flat to slightly down as that customer reduces inventory. Consolidated operating income is expected to be flat to slightly lower, and management anticipates positive net income, while cautioning that results are uncertain.
Management expects FY2020 patent litigation and compliance expense of approximately $2.5 million to $3.0 million, compared with $2.4 million in FY2019. It also expects continued upward cost pressure from ingredient availability, labor, transportation and potential tariffs, and cites potentially lower average euro exchange rates. The filing identifies customer concentration, supplier dependence—including a single beta-alanine supplier—generic competition, patent enforcement costs, regulatory compliance, order timing, and foreign-exchange and tariff exposure as significant risks.
Other items to note: NAI expects adoption of lease accounting in FY2020 to add approximately $20.4 million of lease liabilities and $20.3 million of right-of-use assets to its balance sheet, with an immaterial income-statement impact. Operating lease commitments at June 30, 2019 totaled $15.2 million. The company reported no material pending legal proceedings as of September 24, 2019, while noting ongoing intellectual-property matters and uncertainty about their outcomes. The financial statements received an unqualified audit opinion; management assessed disclosure controls and internal control over financial reporting as effective.
Important facts for investors to verify
- Whether the top customer’s demand and inventory reduction, and NAI’s customer-diversification efforts, develop as projected.
- Whether CarnoSyn and SR CarnoSyn sales recover, including the commercial impact of generic competition, the NDI status, patent outcomes, and Japan distribution.
- Whether expected FY2020 revenue growth and operating-income outlook account adequately for legal spending, input-cost inflation, tariffs and currency movements.
- Whether inventory, receivables and customer collections remain manageable; FY2019 days sales outstanding rose to 40 days from 32.
- The impact of lease-accounting adoption, continued access to the $10 million credit line, and compliance with its financial covenants.