Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are with the corresponding 2018 periods.
Business context
NAI provides private-label contract manufacturing of nutritional and health products and sells beta-alanine raw materials and licensing rights under its CarnoSyn and SR CarnoSyn brands. Results remain dependent on a small number of manufacturing customers, especially the largest customer.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $29.1m, down 19% | $58.3m, down 20% |
| Gross profit / margin | $5.1m / 17.4%, versus $6.4m / 17.9% | $9.4m / 16.2%, versus $13.6m / 18.7% |
| Operating income / margin | $0.7m / 2.4%, down 68% | $0.6m / 1.1%, down 87% |
| Net income | $0.5m, down 78%; diluted EPS $0.07 | $0.6m, down 88%; diluted EPS $0.08 |
| Operating cash flow | Not separately presented | $4.8m, versus $8.2m |
For the six months, private-label manufacturing sales fell 19% to $50.8m, while patent and trademark licensing sales fell 24% to $7.5m. In the quarter, those segments declined 22% to $24.8m and 3% to $4.3m, respectively. Cash sales discounts to Juice Plus+ were $0.8m for the six-month period.
Six-month cash used in investing activities was $1.6m, primarily for $1.6m of capital expenditures; cash used in financing was $1.3m, largely due to share repurchases. Cash and equivalents ended at $26.9m, up from $25.0m at June 30, 2019. The filing reports no borrowings or long-term debt outstanding and $10.0m available under its credit facilities.
Liquidity, balance sheet and capital
- Current assets were $68.5m and current liabilities $11.2m at December 31, 2019.
- Total assets were $109.5m and stockholders’ equity $76.1m. Operating lease right-of-use assets were $19.5m and operating lease liabilities $19.7m.
- NAI says it was in compliance with credit-facility covenants and expects cash, operating cash flows and available credit to fund working capital and capital expenditures for at least the next 12 months.
- Six-month share repurchases cost $1.3m. The board increased the repurchase authorization from $7.0m to $9.0m on January 8, 2020.
Material changes and management commentary
- Management attributed lower manufacturing sales primarily to reduced orders from the largest customer. That customer represented 46% of six-month sales, down from 55% a year earlier; sales to it fell from $38.8m to $26.8m.
- Beta-alanine revenue declined due to lower shipments, market and seasonal factors, lower average selling prices, some customers switching to generic beta-alanine, and weaker demand for customers’ CarnoSyn products.
- Management cited marginally higher per-unit manufacturing costs and a less favorable sales mix as factors in lower gross margins; SG&A rose 2% for the six months, primarily reflecting higher patent and trademark legal costs.
- Litigation and patent-compliance expenses were approximately $1.4m for the six months, versus $0.96m in the prior-year period. NAI cited its favorable 2019 federal appeals court patent ruling and FDA New Dietary Ingredient status for CarnoSyn as support for its enforcement efforts. Japan approved beta-alanine for food-market sale in 2019, and NAI had begun shipments there.
Outlook, risks and unusual items
- For fiscal 2020, management expected consolidated revenue to decline approximately 10%–15% from fiscal 2019. For the second half, it expected sales to the largest manufacturing customer to decline 20%–25% year over year, CarnoSyn revenue to be comparable, and operating income to be flat to slightly favorable versus the prior-year second half. These are expectations, not guarantees.
- Management planned continued investment in SR CarnoSyn marketing for Wellness and Healthy Aging, expansion in Japan, customer diversification, operational efficiencies and intellectual-property enforcement. It cautioned that these efforts may not reverse or slow future sales declines.
- Key disclosed risks include major-customer and receivables concentration, dependence on a limited number of qualified raw-material suppliers, generic beta-alanine competition, customer order variability, foreign exchange movements, and the cost and outcome of intellectual-property litigation. The three largest customers held 77.1% of gross receivables at period-end.
- Ordinary-course legal matters were disclosed; NAI reported no material pending proceeding as of February 11, 2020, while noting ongoing intellectual-property enforcement matters and uncertainty over potential outcomes. Management did not expect current matters to have a material adverse effect, but unfavorable outcomes could affect results.
- Adoption of lease accounting (ASC 842) on July 1, 2019 added approximately $20.8m of right-of-use assets and $20.9m of lease liabilities at adoption; management said the adoption did not materially change operating results. A hedge-accounting standard changed presentation of forward-point amortization from other income to net sales, complicating period-to-period comparisons. The quarter also recorded a $0.9m after-tax unrealized derivative loss in other comprehensive income.
Most important facts for investors to verify
- Whether the largest customer’s lower orders persist and whether customer concentration continues to decline.
- Whether manufacturing and CarnoSyn sales stabilize as management projected, including progress in Japan and SR CarnoSyn’s target markets.
- Gross-margin and operating-income trends, including manufacturing costs, sales mix, discounts and legal spending.
- Cash conversion and working-capital trends, especially days sales outstanding, which rose to 48 days from 36 days in the prior-year period.
- The effectiveness and cost of patent enforcement, and continued availability of qualified beta-alanine and other raw-material suppliers.