Natural Alternatives International, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context
NAI provides private-label contract manufacturing of nutritional and health products and sells beta-alanine and related royalties under its CarnoSyn trademarks. It reports private-label contract manufacturing and patent and trademark licensing as its two segments.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Year-over-year | Six months ended Dec. 31, 2016 | Year-over-year |
|---|---|---|---|---|
| Net sales | $30.6 | +14% | $64.6 | +33% |
| Gross profit / margin | $6.5 / 21.3% | Margin +0.2 points | $14.2 / 21.9% | Margin +0.5 points |
| Operating income / margin | $3.1 / 10.2% | +14%; margin flat | $6.6 / 10.3% | +49%; margin +1.1 points |
| Net income | $2.5 | +32% | $5.0 | +61% |
| Diluted earnings per share | $0.37 | Compared with $0.28 | $0.74 | Compared with $0.46 |
- First-half segment sales: private-label manufacturing $51.2 million, up 35%; licensing and beta-alanine $13.4 million, up 26%. Growth reflected higher existing-product volumes, new products and customers, and increased shipments.
- First-half operating cash flow was $5.0 million, versus $5.1 million a year earlier. Capital expenditures were $3.4 million, compared with $1.4 million; cash increased to $21.4 million from $19.7 million at June 30, 2016.
- At December 31, current assets were $52.3 million and current liabilities $11.5 million; working capital was $40.8 million. The company reported no consolidated debt and $10.0 million available under its credit line. It was in compliance with facility covenants.
- Foreign-exchange contracts had a $2.0 million net fair-value asset. First-half net income includes a $0.2 million foreign-exchange gain; derivative gains also increased other comprehensive income, with $1.3 million expected to be reclassified into earnings over the next 12 months.
Changes, outlook and risks
- Management lowered its full-year FY2017 consolidated revenue-growth expectation to approximately 5%–10%, citing reduced contract-manufacturing orders and forecasts from Australia, Asia and Europe. It expected most of the decline in Q3 and less in Q4, and believed international revenue would recover beginning in FY2018.
- Management expected CarnoSyn beta-alanine sales growth to continue through the rest of FY2017. It cited customer additions and increased shipments as first-half growth drivers.
- Largest-customer concentration increased to 50% of first-half sales from 39% a year earlier; management expected it to remain around 50% for the rest of FY2017. The customer represented $15.1 million, or approximately 49%, of Q2 sales.
- First-half litigation and patent-compliance expenses were approximately $2.0 million, versus $0.8 million in the prior-year period. The company described multiple ongoing intellectual-property enforcement matters; outcomes and expenses remain uncertain. Two patents rejected by the USPTO and upheld by the PTAB were subject to rehearing requests and expire in August 2017.
- Management cited limited suppliers for certain raw materials, including beta-alanine, as a potential business risk. It also cautioned that order timing, customer concentration, foreign exchange, and the temporary nature of the expected international slowdown could affect results.
- NAI stated that available cash, working capital and expected operating cash flows should fund working-capital needs and capital expenditures for at least 12 months. This is management’s outlook, not a guarantee.
Important facts for investors to verify
- Whether forecasted international order reductions occur as expected and whether FY2017 growth remains within the 5%–10% outlook.
- How customer concentration evolves, particularly the largest customer’s approximately 50% share of sales.
- Progress and outcomes of patent and trademark disputes, including the pending rehearing requests and related legal costs.
- Whether beta-alanine supply, customer growth and CarnoSyn sales support the expected continued growth.
- How foreign-exchange hedge values and gains are ultimately recognized, and whether operating cash flow covers planned capital spending.