Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017 (fiscal Q3 2017). The request metadata says 2016 Q3, but the filing itself reports fiscal 2017 results.
Business context
NAI manufactures private-label nutritional supplements and earns revenue from beta-alanine raw-material sales, royalties and licensing under its CarnoSyn and SR CarnoSyn brands. Its reportable segments are private-label contract manufacturing and patent and trademark licensing.
Financial results
| Metric | Three months ended March 31, 2017 | Nine months ended March 31, 2017 |
|---|---|---|
| Net sales | $25.1 million; down 16% year over year | $89.8 million; up 14% |
| Gross profit / margin | $5.1 million / 20.4%, versus 21.5% | $19.3 million / 21.5%, unchanged as a percentage of sales |
| Operating income / margin | $1.0 million / 4.0%, down 68% | $7.6 million / 8.5%, up 1% |
| Net income | $0.7 million, down 75%; diluted EPS $0.11 | $5.7 million, down 7%; diluted EPS $0.86 |
| Operating cash flow | Not separately reported for the quarter | $7.9 million, versus $2.4 million |
| Capital expenditures | Not separately reported for the quarter | $4.3 million, versus $7.0 million |
Quarterly contract-manufacturing sales fell 24% to $18.5 million, primarily from lower orders in Asia and Europe; licensing sales rose 20% to $6.6 million. For the nine months, contract-manufacturing sales increased 12% to $69.8 million and licensing sales rose 24% to $20.0 million. Quarterly gross margin weakened mainly because of product mix and higher unit manufacturing costs; licensing margin improved.
Balance sheet and liquidity
At March 31, 2017, cash and cash equivalents were $22.6 million, total current assets $49.2 million, current liabilities $8.6 million, total assets $70.0 million and stockholders’ equity $59.9 million. NAI had no debt outstanding and had $10.0 million available under its working-capital credit line, recently extended to February 1, 2020. The company reported covenant compliance and believes available resources and operating cash flows will fund working capital and capital expenditures for at least 12 months.
Nine-month operating cash flow benefited from collections and inventory reductions, while accounts payable and accrued liabilities used $8.6 million of cash. Cash increased $2.8 million over the period. NAI repurchased 39,547 shares during the nine months for $345,000 and increased the authorized repurchase plan to $7.0 million.
Changes, outlook and risks
- Management expected fiscal 2017 consolidated revenue growth of approximately 5%–10%, citing reduced contract-manufacturing orders and forecasts from Australia, Asia and Europe. It said most of the expected decline occurred in Q3, expected a smaller decline in Q4, and anticipated the international decline would reverse in fiscal 2018. CarnoSyn sales were expected to continue at current levels.
- Management cited higher litigation, patent-compliance and patent-application costs: approximately $3.0 million for the first nine months, versus $1.3 million in the prior-year period. SG&A increased 25% for the nine months, also reflecting compensation costs associated with sales growth.
- The prior-year comparable quarter included a one-time $1.6 million pretax gain from the sale of the former San Marcos headquarters, contributing to the sharp year-over-year decline in other income and net income.
- Customer concentration remains significant: the largest customer represented 48% of nine-month sales, versus 40% a year earlier. The filing also identifies reliance on a limited number of raw-material suppliers, including beta-alanine suppliers.
- NAI reported ongoing intellectual-property enforcement litigation, including pending matters with scheduled trials in 2018, and an appeal concerning two patents that expire in August 2017. Management said outcomes and litigation costs are uncertain; it generally did not expect ordinary-course matters to have a material adverse effect based on information available.
- A new patent application received a Notice of Allowance in March 2017. Management said the claims could extend coverage for instant-release CarnoSyn to 2023, subject to issuance and its efforts to obtain additional claims.
- Foreign-exchange forward contracts had a $1.1 million net asset fair value and approximately $23.1 million notional value at quarter-end. The company reported a net gain in OCI for the nine months and expected most of the related balance to be reclassified into earnings over the next 12 months.
Key facts for investors to verify
- Whether the expected 5%–10% fiscal 2017 revenue growth and anticipated fiscal 2018 international recovery materialized.
- Whether customer concentration, order timing and international demand affect future revenue and cash conversion.
- How patent enforcement outcomes, the August 2017 patent expirations and ongoing legal spending affect CarnoSyn revenue and profitability.
- Whether manufacturing cost pressures and elevated SG&A moderate, and whether reported cash flow remains sustainable as working-capital balances change.
- The eventual earnings impact of foreign-exchange hedges and the progress of the pending litigation.