Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2021. Although the request metadata says “2020 Q3,” this is the company’s fiscal third quarter of 2021, not 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and financial performance
NAI manufactures private-label nutritional and health products and earns revenue from beta-alanine raw-material sales and patent and trademark licensing, including CarnoSyn and SR CarnoSyn. For the nine months, private-label manufacturing represented $124.6 million of $134.1 million in sales.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $46.3 million, up 82% | $134.1 million, up 60% |
| Gross profit / margin | $6.8 million / 14.8% (prior: 11.4%) | $22.5 million / 16.8% (prior: 14.7%) |
| Operating income (loss) / margin | $2.7 million / 5.8% (prior: $(4.2) million) | $10.2 million / 7.6% (prior: $(3.6) million) |
| Net income (loss) | $1.9 million; diluted EPS $0.30 (prior loss: $4.0 million) | $7.8 million; diluted EPS $1.22 (prior loss: $3.4 million) |
| Cash provided by operating activities | Not separately presented for the quarter | $16.0 million (prior: $5.2 million) |
Quarterly manufacturing sales rose 86% and licensing sales rose 46%. Nine-month manufacturing sales increased 70%, while licensing sales fell 7% to $9.6 million. NAI attributed manufacturing growth to higher shipments of existing products and sales of new products to new and existing customers. Licensing sales benefited in the quarter from increased shipments as athletic activities and gyms reopened, but the nine-month comparison reflected customer shifts to generic beta-alanine and COVID-related weakness earlier in the period.
Cash, debt and liquidity
At March 31, 2021, cash and cash equivalents were $28.1 million, down from $30.5 million at June 30, 2020. Current assets were $77.2 million and current liabilities $23.4 million. NAI had no balance outstanding on its $10.0 million revolving credit facility after repaying the full balance on February 2, 2021; the full facility was available, and the company reported compliance with its covenants. The facility matures November 1, 2022.
Nine-month investing cash outflow was $4.2 million, principally $4.3 million of capital expenditures. Financing cash outflow was $14.1 million, including $10.0 million of credit-line repayment and $4.1 million of share repurchases. Cash declined $2.4 million overall. Operating cash flow less capital expenditures was approximately $11.7 million. Operating lease liabilities totaled $17.0 million long term; these are lease obligations, not borrowings under the credit facility.
Material changes, outlook and risks
- Profitability improved: NAI returned to operating and net profitability versus losses in the comparable periods. Lower bad-debt expense contributed materially: the prior-year periods included a $3.3 million provision related to a former customer. Higher sales and lower per-unit manufacturing costs also supported gross margin; the prior year included a $1.0 million inventory reserve.
- Guidance: Management expects fiscal 2021 net sales to increase 45%–55% versus fiscal 2020 and operating income to be 7%–9% of sales. These are expectations, not assurances; management cautioned that COVID-19 effects remain difficult to predict.
- Customer concentration: The largest customer accounted for 54% of nine-month sales, up from 43% in the comparable prior period. Management expects its share of full-year fiscal 2021 revenue to exceed fiscal 2020. Two largest customers together represented 52.1% of gross receivables at quarter-end.
- Other business risks: COVID-19 could disrupt employees, suppliers, shipping, customer demand or collections. NAI also depends on a limited number of suppliers meeting its quality standards. It reported a $3.2 million fully reserved receivable from a former customer and a $0.5 million inventory reserve related to that customer.
- Foreign exchange and hedging: Nine-month foreign-exchange loss was $1.3 million, compared with $0.1 million a year earlier. Cash-flow hedge contracts had approximately $52.5 million notional value and a net liability position; NAI expected about $0.5 million of hedge losses to be reclassified into earnings over the next 12 months.
- Unusual items and contingencies: A $0.9 million discrete tax benefit was recorded in the first nine months. Quarterly comprehensive income included a $1.9 million unrealized derivative gain, which is distinct from net income. NAI reported ordinary-course legal matters but no material pending legal proceeding as of May 13, 2021, and did not expect current matters to have a material adverse effect based on available information.
Management said cash, operating cash flows and available borrowing capacity should fund working capital and capital expenditures for at least the next 12 months. It also highlighted investment in SR CarnoSyn, customer diversification, operational efficiency and cost management. Disclosure controls were assessed as effective as of March 31, 2021.
Important facts for investors to verify
- Whether the fiscal 2021 sales and operating-income outlook was achieved, and how much results depended on the largest customer.
- Whether customer and supplier concentration, order timing, or COVID-related disruptions affected subsequent sales, margins or collections.
- Trends in beta-alanine sales, customer use of generic alternatives, and commercialization of SR CarnoSyn.
- Cash conversion, inventory growth, capital spending and the company’s continued ability to meet credit-facility covenants.
- Subsequent foreign-exchange movements and the timing and earnings impact of hedge reclassifications.
- Developments in legal matters, the former-customer receivable and inventory reserves, and tax benefits or examinations.