Natural Alternatives International, Inc. — Form 10-Q Summary
Business and period: The filing covers the quarter and six months ended December 31, 2014 (fiscal 2015 Q2), compared with the same periods in 2013. NAI primarily manufactures nutritional supplements under contract, and also earns beta-alanine patent and trademark licensing revenue. Its Pathway to Healing branded product line was being discontinued.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Net sales | $18.618 million, up 13.0% | $37.313 million, up 11.0% | $16.475 million and $33.630 million |
| Gross profit / margin | $3.977 million / 21.4% | $6.774 million / 18.2% | $2.525 million / 15.3%; $5.259 million / 15.6% |
| Operating income / margin | $1.381 million / 7.4% | $1.950 million / 5.2% | $0.264 million / 1.6%; $0.354 million / 1.1% |
| Net income / diluted EPS | $1.081 million / $0.16 | $1.568 million / $0.23 | $0.194 million / $0.03; $0.282 million / $0.04 |
| Operating cash flow | $1.971 million for six months | $1.334 million for six months |
Amounts are U.S. dollars; financial statement amounts are reported in thousands unless otherwise noted. Six-month capital expenditures were $0.925 million, and share repurchases used $0.442 million.
Balance sheet, debt and liquidity
- At December 31, 2014, cash and cash equivalents were $20.117 million; total current assets were $40.653 million and current liabilities were $6.761 million.
- Total assets were $51.634 million and stockholders’ equity was $44.471 million. NAI reported no consolidated debt outstanding.
- A new Wells Fargo facility provides up to $5.0 million; no amount was drawn. Including the subsidiary facility, NAI reported $5.5 million available under credit facilities and said it was covenant-compliant. The facilities are secured, and borrowings are subject to financial covenants.
- Management said cash, cash flows and available credit should fund working capital and capital expenditures for at least the next 12 months. $8.5 million of cash and $0.505 million of available credit were held by the Swiss subsidiary; foreign earnings were considered indefinitely reinvested.
Changes and operating drivers
- Contract manufacturing sales rose 11.2% for the quarter and 12.6% for six months, primarily from higher volumes, new customer products and favorable euro exchange rates. Juice Plus+ sales increased; sales to Mannatech and other customers declined.
- Licensing revenue rose 26.5% in the quarter, but fell 9.4% over six months to $2.419 million. The six-month comparison reflected $0.3 million of Abbott license revenue in 2013 and none in 2014; Abbott terminated its agreement in November 2013.
- Gross margin improved, particularly in contract manufacturing, due mainly to lower leasehold depreciation, favorable sales mix and exchange rates. SG&A rose 14.8% in the quarter, largely because of employee compensation, but declined 1.7% for the six-month period as litigation costs fell.
- NAI discontinued Pathway to Healing, with termination activities substantially complete by December 31. Better-than-expected inventory sell-through allowed a $0.190 million reserve release, reducing cost of goods sold.
- Customer concentration remains high: the two largest contract manufacturing customers represented 60% of that segment’s sales for the six months, versus 54% a year earlier. One customer alone represented 47%.
Outlook, risks and unusual items
- Management expected sales to remain relatively stable in the second half of fiscal 2015, but expected operating income to be lower than in the first half and the comparable prior-year period. Cited factors included an anticipated unfavorable product mix and potential effects from a prolonged West Coast port labor dispute.
- Management’s priorities were to develop additional contract manufacturing customers, commercialize and protect the beta-alanine patent estate, and improve efficiency and cost management. It expected customer concentration to decrease marginally as new and existing-customer sales developed.
- NAI faces customer and supplier concentration risk, including dependence on a limited number of beta-alanine and other raw-material suppliers. Foreign exchange movements and the effectiveness of hedges are additional risks.
- Patent litigation with Woodbolt and related parties remained pending. The USPTO had rejected claims of two NAI patents in re-examinations; appeals were pending, including a scheduled hearing for one patent. NAI warned that adverse patent decisions could materially harm its business. A separate DNP dispute was settled in July 2014, with DNP agreeing to exit the beta-alanine business.
- Cash-flow hedges had a $1.5 million net fair-value asset at December 31. Six-month comprehensive income included $0.740 million of after-tax unrealized derivative gains; NAI expected the related OCI balance to be reclassified into earnings within 12 months alongside the hedged transactions.
- NAI reported effective disclosure controls as of December 31, 2014, and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether second-half sales and operating income tracked management’s outlook, particularly given product mix and port disruption risks.
- Whether NAI can diversify contract manufacturing revenue and reduce dependence on its largest customers and concentrated suppliers.
- Developments in the Woodbolt litigation and patent appeals, and their potential effect on CarnoSyn licensing revenue.
- How much reported margin improvement depended on favorable foreign exchange, lower depreciation and the one-time branded-inventory reserve release.
- Cash availability and any restrictions or tax costs associated with the foreign subsidiary’s indefinitely reinvested earnings.