Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2018. The company manufactures private-label nutritional and health products and sells beta-alanine raw materials and related patent and trademark licenses.
Financial performance
| Metric | Three months ended March 31, 2018 | Year to date |
|---|---|---|
| Net sales | $31.8 million, up 27% year over year | $93.2 million, up 4% |
| Gross profit and margin | $6.7 million; 21.1% (20.4% prior year) | $19.7 million; 21.1% (21.5% prior year) |
| Operating income and margin | $2.5 million; 7.9% (up from $1.0 million; 4.0%) | $6.7 million; 7.2% (down from $7.6 million; 8.5%) |
| Net income and diluted EPS | $2.1 million; $0.30 (prior year $0.7 million; $0.11) | $2.2 million; $0.32 (prior year $5.7 million; $0.86) |
| Operating cash flow | Not separately presented for the quarter | $4.7 million (prior year $7.9 million) |
At March 31, cash and cash equivalents were $27.6 million, total current assets $66.1 million, and current liabilities $20.8 million. The company had no borrowings or long-term debt and had $10.0 million available on its revolving credit line. The $10.0 million facility matures February 1, 2021; the company reported covenant compliance. Nine-month capital expenditures were $2.9 million. Cash declined $0.2 million from June 30, 2017.
Changes versus prior comparable periods
- Quarterly private-label manufacturing sales rose 38%, supported by new products and higher customer volumes, including shipments to the largest customer. Nine-month manufacturing sales rose 11%.
- Patent and trademark licensing sales, primarily beta-alanine, fell 6% for the quarter and 20% year to date. Nine-month CarnoSyn beta-alanine revenue was $16.0 million versus $20.0 million, reflecting lower shipments and average prices.
- Quarterly operating income improved with higher sales and favorable manufacturing product mix. Year-to-date operating income declined 12%, as higher SG&A and lower licensing-segment activity offset manufacturing growth.
- Year-to-date net income was substantially lower largely because of $3.3 million in provisional discrete tax charges related to the Tax Cuts and Jobs Act. The reported nine-month effective tax rate was 69.4%, versus 29.9% a year earlier.
Outlook, management commentary, and risks
- Management expects cash, working capital, and potential operating cash flows to fund working capital needs and planned capital expenditures for at least 12 months. No numerical sales or earnings guidance is provided.
- Management plans to develop additional manufacturing customers, expand commercialization of its beta-alanine patent estate, and improve operating efficiency. It said third-quarter beta-alanine reorders returned to historical levels, but cautioned this may not reverse future declines.
- Customer concentration is material: the largest customer represented 53% of nine-month sales, up from 48% in the prior-year period. The three largest customers held 65.4% of gross receivables at quarter-end.
- Beta-alanine faces generic competition and market/seasonality risks; the company also depends on a limited number of raw-material suppliers. It incurred approximately $2.4 million of patent litigation and compliance expenses in the first nine months.
- Foreign-exchange forward contracts had a $3.1 million net liability at quarter-end, with approximately $2.4 million expected to be reclassified into earnings over the next 12 months. Currency movements affected comprehensive income.
- Inventory increased to $23.8 million from $13.7 million, using $10.1 million of cash year to date, partly to support expected shipments to the largest customer. A $1.5 million receivable from customer Kaged Muscle was converted into a secured 12-month note bearing 15% interest.
- The company recorded provisional tax costs for transition and withholding taxes and deferred-tax remeasurement; the tax accounting was not complete and could change. The transition tax is expected to be paid over eight years.
- Intellectual-property litigation remains ongoing, including appeals involving patent rulings; other proceedings were settled, dismissed, or stayed. Management said it did not generally expect pending matters to have a material adverse effect, but outcomes and costs remain uncertain.
- The August 2017 Juice Plus+ agreements grant NAI exclusive manufacturing rights for certain products in 24 countries and include a restricted award of 500,000 shares, with expense recorded as a reduction of revenue. NAI recorded $653,000 of related expense year to date.
Key facts for investors to verify
- Whether manufacturing growth and planned shipments continue, and how reliance on the largest customer evolves.
- Whether beta-alanine demand, pricing, generic competition, and patent enforcement support a recovery in licensing revenue.
- Inventory conversion, collections, and the repayment and collectability of the Kaged Muscle note.
- Final tax effects of the Tax Cuts and Jobs Act and any resulting changes to reported tax expense or liabilities.
- Future movements in foreign-exchange hedge values and their effect on revenue, earnings, and comprehensive income.