Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2012; filed February 12, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
NAI manufactures nutritional supplements and other health products for private-label customers, licenses patents and trademarks associated principally with CarnoSyn beta-alanine, and sells its Pathway to Healing branded products. Private-label contract manufacturing remains the largest business and revenue source.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $13.686 | $16.161 | $30.146 | $34.502 |
| Gross profit / margin | $1.919 / 14.0% | $3.353 / 20.7% | $5.503 / 18.3% | $8.036 / 23.3% |
| Operating income (loss) | ($0.273) | $1.226 | $0.756 | $3.573 |
| Net income | $0.102 | $0.785 | $0.799 | $2.313 |
| Diluted earnings per share | $0.01 | $0.11 | $0.12 | $0.33 |
| Operating cash flow | Not presented separately | Not presented separately | $4.193 | ($3.103) |
Quarterly sales fell 15.3%; six-month sales fell 12.6%. Contract manufacturing sales declined 16.7% for the quarter and 13.8% for six months. Licensing revenue rose 14.4% and 7.0%, respectively; branded-product revenue declined 16.1% and 15.4%. SG&A increased 3.1% for the quarter and 6.4% for six months. Management attributed weaker margins chiefly to lower production volumes, which raised per-unit manufacturing costs; litigation and patent-prosecution costs also increased.
Six-month operating cash flow improved to $4.2 million from $3.1 million used in the prior-year period, principally reflecting a $5.4 million cash source from accounts receivable. Cash and cash equivalents were $17.0 million at December 31, 2012, versus $14.5 million at June 30, 2012. Capital expenditures were $1.1 million. NAI reported no consolidated debt outstanding and $5.5 million available under credit facilities; it was in compliance with credit-agreement covenants.
Financial position and material changes
At December 31, 2012, total assets were $44.6 million and current assets were $32.4 million, compared with $47.2 million and $34.5 million, respectively, at June 30, 2012. Current liabilities declined to $4.5 million from $6.8 million. Accounts receivable fell to $3.3 million from $8.8 million, while inventory rose to $9.4 million from $8.4 million. NAI repurchased 107,278 shares during the six-month period for $592,000; shares outstanding, net of treasury shares, were 6,853,409 at December 31.
Customer concentration remained high: the two largest private-label customers represented 72% of private-label sales for the six months, down from 77% a year earlier. One customer alone accounted for 55% of six-month private-label sales. International sales were $12.3 million, down from $15.4 million.
Outlook, commentary, risks and unusual items
- Management expected concentration among its two largest contract-manufacturing customers to decrease marginally in the rest of fiscal 2013, anticipating increased sales to other existing customers. It provided no numerical earnings or revenue guidance.
- Management said available cash, expected operating cash flows and credit availability should fund working capital and capital expenditures for at least 12 months. $7.1 million of cash and $547,000 of credit availability were held by Swiss subsidiary NAIE; foreign earnings were considered indefinitely reinvested, and repatriation could result in additional U.S. taxes.
- The Abbott beta-alanine license agreement was amended. Abbott paid a $204,167 fee in December 2012; further fees and approximately $2.8 million in annual installments are conditional under the amended terms. Abbott may terminate through December 1, 2013, so future fees and royalties are not assured.
- Six-month licensing revenue was $2.2 million and included $708,000 of license-fee revenue and $103,000 of beta-alanine raw-material sales. NAI said beta-alanine raw-material inventory had fallen to zero and it did not anticipate material direct purchases and sales of that material for the rest of fiscal 2013.
- NAI cited patent litigation and reexamination proceedings involving its beta-alanine patents as risks. A court dismissed Woodbolt’s Delaware case in January 2013; related patent litigation remained pending, and the USPTO had accepted requests to reexamine two patents. An adverse patent ruling could materially affect the business.
- Quarterly pretax loss of $266,000 was offset by an income-tax benefit of $368,000, yielding net income of $102,000. The effective tax benefit rate was 138.3% for the quarter; tax benefits and unusual items may make the rate variable.
- Forward foreign-exchange contracts had a $66,000 net liability at December 31, 2012; $62,000 of related losses were expected to be reclassified into earnings over the next 12 months with the associated forecast transactions.
Important facts for investors to verify
- Whether customer demand and production volumes recover enough to improve contract-manufacturing utilization and gross margins.
- How customer concentration, particularly the largest customer’s 55% share of six-month private-label sales, evolves.
- Abbott’s continuation of the amended agreement, achievement or payment of remaining fees, and any resulting royalties or supply business.
- Outcomes of patent litigation and patent reexaminations, and the level of related legal costs.
- The source and sustainability of operating cash flow, including the receivables collection benefit, and the adequacy of inventory for customer demand.
- The filing’s repurchase disclosure states “quarter ended December 31, 2013,” although the report covers the quarter ended December 31, 2012; verify the apparent date error. The filing reports 79,845 shares repurchased in the quarter for $442,000.