Natural Alternatives International, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the three months ended September 30, 2016, the first quarter of fiscal 2017 (the request labels it 2016 Q1). NAI provides private-label nutritional supplement contract manufacturing and sells beta-alanine raw materials and earns royalties and licensing revenue under its CarnoSyn brand.
Financial performance
| Metric | Quarter ended Sep. 30, 2016 | Prior-year quarter |
|---|---|---|
| Net sales | $34.1 million | $21.6 million |
| Gross profit / margin | $7.7 million / 22.5% | $4.7 million / 21.9% |
| Operating income / margin | $3.5 million / 10.4% | $1.7 million / 8.0% |
| Net income | $2.5 million | $1.2 million |
| Diluted EPS | $0.37 | $0.18 |
| Operating cash flow | $(0.1) million | $(2.3) million |
Contract manufacturing sales rose 68% to $27.4 million; patent and trademark licensing sales rose 26% to $6.7 million. International sales were $18.8 million versus $8.8 million a year earlier. The effective tax rate was 30.6%, compared with the 34% federal statutory rate; management attributed the difference primarily to lower-taxed foreign earnings.
Financial position and liquidity
At September 30, 2016, cash and equivalents were $17.8 million, down $1.9 million from June 30. Current assets were $55.6 million and current liabilities $17.8 million. Inventory was $23.3 million, up $2.5 million since fiscal year-end. Total assets were $75.1 million and stockholders’ equity $56.0 million.
NAI reported no consolidated debt or credit-facility borrowings. It had $10.5 million available under credit facilities, including a $10 million Wells Fargo working-capital line, and reported compliance with its covenants. Management said cash, expected operating cash flows and available credit would fund working-capital needs and capital expenditures for at least 12 months.
Operating cash use reflected a $2.5 million inventory build, partly offset by collections and other working-capital movements. Capital expenditures were $1.7 million, compared with $0.2 million in the prior-year quarter. Cash used in investing was $1.7 million.
Material changes, outlook and risks
- Management attributed strong sales growth to higher volumes of existing products, new product sales and order and shipment timing. It said first-quarter sales benefited from timing and new product launches.
- Management expected fiscal 2017 revenue growth of approximately 20%–30% on an annualized basis. It expected the largest contract-manufacturing customer to represent about 46% of annualized fiscal 2017 revenue; that customer accounted for 50% of quarterly sales, versus 31% a year earlier.
- Gross margin improved 0.6 percentage points. Contract-manufacturing margin contribution declined slightly due primarily to overhead; licensing margin contribution increased, primarily because of lower supply-chain costs.
- SG&A rose 38% to $4.1 million, mainly from higher compensation and litigation and patent-compliance costs. NAI reported approximately $994,000 of such costs, versus $472,000 in the prior-year quarter.
- NAI’s beta-alanine business depends on customer growth, raw-material availability, patent rights and third-party compliance. The filing notes a limited number of suppliers, including for beta-alanine. Significant customer concentration also exposes results to changes in orders or customer payment capacity.
- Foreign-exchange forward contracts designated as cash-flow hedges had a $323,000 net liability at quarter-end and approximately $462,000 of net losses in accumulated OCI expected to be reclassified into earnings over the next 12 months with the related transactions. Contracts were expected to settle through August 2017.
- NAI described multiple ongoing intellectual-property, trademark and contract matters, including patent-related actions against several companies. It warned litigation expenses could exceed expectations and outcomes were uncertain; it generally did not expect ordinary-course matters to materially harm the business based on information available.
- Management planned to pursue customer diversification, expand CarnoSyn and SR CarnoSyn commercialization, protect intellectual property, and improve operating efficiency and cost management. The filing gives no numerical earnings or margin guidance.
Key facts for investors to verify
- Whether revenue growth and the 20%–30% fiscal 2017 growth expectation persist beyond a quarter affected by shipment timing and product launches.
- Largest-customer concentration, its expected annual share, and the durability of customer orders.
- Inventory growth, operating cash conversion and the returns from increased capital spending.
- Beta-alanine supply availability, patent protection and the cost and outcomes of ongoing litigation.
- Foreign-exchange hedge exposures and the timing and earnings impact of OCI reclassification.