Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013; year-over-year comparisons are with the corresponding 2012 periods. The financial statements are unaudited. NAI manufactures nutritional supplements under contract, licenses beta-alanine-related patents and trademarks, and sells branded products.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $16.475 million | $13.686 million | $33.630 million | $30.146 million |
| Gross profit | $2.525 million | $2.059 million | $5.259 million | $5.761 million |
| Gross margin | 15.3% | 15.0% | 15.6% | 19.1% |
| Operating income (loss) | $264,000 | $(273,000) | $354,000 | $756,000 |
| Net income | $194,000 | $102,000 | $282,000 | $799,000 |
| Diluted earnings per share | $0.03 | $0.01 | $0.04 | $0.12 |
Second-quarter revenue rose 20.4%; contract manufacturing sales increased 20.1% and licensing sales 39.9%, while branded-product sales fell 17.8%. For the six-month period, revenue rose 11.6%, but gross profit declined 8.7% and operating income fell 53.2%. Management attributed the six-month margin pressure principally to unfavorable product and material mix, lower average prices on some high-volume products, and lower euro exchange rates. Six-month SG&A declined 2.0% to $4.905 million.
Cash, liquidity, and capital
- Cash and cash equivalents were $16.415 million at December 31, 2013, down $282,000 from June 30, 2013. Six-month operating cash flow was $1.334 million, versus $4.193 million a year earlier.
- Investing cash outflow was $1.593 million, including $1.673 million of capital expenditures; financing cash outflow was $23,000, primarily share repurchases.
- Current assets were $35.654 million and current liabilities $6.494 million. Total liabilities were $6.728 million and stockholders’ equity $40.497 million.
- NAI reported no consolidated debt outstanding. It reported $5.6 million available under credit facilities and compliance with the Wells Fargo facility covenants. The company believed cash, available facilities, and expected operating cash flows would fund working capital and capital expenditures for at least 12 months.
- Inventory increased to $11.777 million from $10.035 million at June 30, mainly reflecting inventory for new customer launches and shipment and receipt timing. The company repurchased 5,100 shares for $23,000 during the six months.
Business changes, outlook, and risks
- Contract manufacturing sales increased for the six months, primarily on higher volumes and new-product sales to new customers. Two largest customers represented 54% of contract manufacturing sales, down from 72% a year earlier; management expected a marginal further decrease in the remainder of fiscal 2014. Customer concentration remains material.
- CarnoSyn royalty and licensing revenue rose 21.5% to $2.671 million for the six months. Abbott terminated its beta-alanine license and supply agreement effective November 27, 2013, citing additional time and cost to bring its product to market. NAI said no further license fees would be paid under that agreement; a previously scheduled $150,000 fee was collected in January 2014.
- Branded-product sales declined 12.5% for the six months, reflecting continued softness in the Pathway to Healing line. Management’s stated priorities were growing contract manufacturing relationships, commercializing and protecting its beta-alanine patent estate, and improving operational efficiency and cost management. No numerical earnings or revenue guidance was provided.
- Risks include reliance on major customers, limited suppliers for certain raw materials including beta-alanine, foreign-exchange exposure, and the outcome and cost of patent litigation. The USPTO rejected claims of the ’381 patent in December 2013; NAI appealed in January 2014. Patent disputes and multiple product-liability suits remained pending. NAI said it was not involved in formulating, manufacturing, distributing, or selling the products at issue in the identified product-liability cases and had sought dismissal and/or indemnification.
- Forward-looking statements are subject to risks and actual results may differ. Management reported disclosure controls were effective as of December 31, 2013 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new and existing customer demand can sustain contract manufacturing growth while reducing customer concentration.
- The expected effect of Abbott’s termination on future licensing revenue and the sustainability of CarnoSyn royalties.
- Whether contract manufacturing margins recover from the six-month decline and inventory levels convert into sales and cash flow.
- Developments in the patent cases and re-examination proceedings, and potential exposure from product-liability litigation.
- Availability and pricing of key raw materials, foreign-exchange movements, and the company’s continued ability to meet credit-facility covenants.