Natural Alternatives International, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter and six months ended December 31, 2020 (fiscal Q2 and first half of fiscal 2021). NAI manufactures private-label nutritional and health-care products and earns revenue from beta-alanine raw-material sales and patent and trademark licensing. Unless noted, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2020 | Prior year | Six months ended Dec. 31, 2020 | Prior year |
|---|---|---|---|---|
| Net sales | $48.1 | $29.1 | $87.8 | $58.3 |
| Gross profit; gross margin | $9.7; 20.1% | $5.1; 17.4% | $15.7; 17.9% | $9.4; 16.2% |
| Operating income; operating margin | $5.4; 11.2% | $0.7; 2.4% | $7.5; 8.5% | $0.6; 1.1% |
| Net income; diluted EPS | $3.6; $0.57 | $0.5; $0.07 | $5.9; $0.91 | $0.6; $0.08 |
| Operating cash flow | Not presented quarterly | $4.7 | $4.8 |
- First-half capital expenditures were $3.0 million, versus $1.6 million a year earlier; operating cash flow less capital expenditures was approximately $1.6 million, versus $3.2 million.
- At December 31, cash and cash equivalents were $28.6 million; current assets were $83.4 million and current liabilities $32.7 million. The company had $10.0 million drawn on its $10.0 million credit line, with no remaining availability at that date. It repaid the balance on February 2, 2021, restoring $10.0 million of availability.
- Operating lease liabilities were $18.0 million long term. The company reported compliance with credit-facility covenants during the six-month period.
Changes versus prior comparable periods
- Quarterly sales increased 65%; first-half sales rose 51%. Private-label manufacturing revenue grew 83% in the quarter and 62% in the first half, driven by new products and higher shipments to existing customers, partly offset by a discontinued customer relationship.
- Patent and trademark licensing revenue fell 35% in the quarter and 27% in the first half. Beta-alanine revenue was $2.8 million for the quarter and $5.4 million for the first half, down from $4.3 million and $7.5 million, respectively.
- Gross margin improved by 2.7 percentage points in the quarter and 1.7 points for the half. Management attributed the manufacturing margin improvement mainly to lower unit costs from greater volume and a favorable sales mix. SG&A fell 2% for the quarter and 7% for the half, primarily due to lower litigation costs.
- Foreign-exchange losses increased to $0.8 million for the quarter and $1.0 million for the half. First-half comprehensive income was $3.9 million, including a $2.0 million after-tax unrealized derivative loss.
- Inventory increased to $34.5 million from $28.0 million at June 30, 2020, using $6.5 million of cash in the first half. Cash declined by $1.8 million over the period, reflecting working-capital investment, capital spending, and $3.5 million of share repurchases.
Outlook, commentary, and risks
- Management expected fiscal 2021 net sales to increase 30%–50% versus fiscal 2020 and operating income to be 5%–7% of net sales. These are expectations, not assurances.
- COVID-19 uncertainty may affect employees, suppliers, production, shipping, customer demand and collections. NAI said its facilities remained operational and that cash and expected operating cash flows should fund working-capital needs and capital expenditures for the next 12 months, while noting the pandemic’s duration and impact could not be reliably estimated.
- Revenue concentration is significant: the largest customer accounted for 56% of first-half sales, up from 46% a year earlier. Two customers together represented about 69% of first-half sales. Management expects the largest customer’s share of fiscal 2021 revenue to exceed fiscal 2020.
- Beta-alanine sales were pressured by former customers switching to generic product and COVID-related limits on sports and gym activity. NAI is investing in SR CarnoSyn and targeting wellness and healthy-aging markets; results depend on market acceptance, patent protection, supply and licensee compliance.
- NAI disclosed a $3.3 million receivable from a former contract-manufacturing customer, fully reserved, and a $0.5 million inventory reserve related to a former customer. It also relies on a limited supplier base for certain materials, including beta-alanine.
- Cash-flow hedge liabilities totaled approximately $3.6 million at December 31, with $2.5 million expected to be reclassified into earnings over the next 12 months. A $0.9 million discrete tax benefit contributed to the low 7.2% first-half effective tax rate. Ordinary-course legal matters were disclosed; as of February 9, 2021, NAI reported no material pending legal proceeding.
Important facts for investors to verify
- Whether the exceptional sales growth and improved manufacturing margins are sustainable, and how customer concentration evolves.
- Whether inventory growth converts to shipments and cash, and whether the former-customer receivable and inventory reserves remain adequate.
- Whether beta-alanine sales recover and the SR CarnoSyn commercialization plans gain traction despite generic competition and industry disruption.
- The effects of foreign-exchange movements and hedge settlements on future earnings, sales and comprehensive income.
- Confirmation of the February 2021 credit-line repayment and progress against fiscal 2021 sales and operating-income expectations.