Natural Alternatives International, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2022 (fiscal 2022 Q3). The request metadata says “2021 Q3,” but the filing itself covers March 31, 2022. Financial amounts below are in millions of dollars unless noted.
Business context and results
NAI manufactures nutritional supplements under private-label contracts and earns revenue from beta-alanine raw material sales, royalties and licensing, including its CarnoSyn and SR CarnoSyn brands. Its results are affected by customer order timing, supply availability and a concentrated customer base.
| Metric | Three months ended Mar. 31, 2022 | Year-over-year | Nine months ended Mar. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $42.4 | Down 9% | $118.4 | Down 12% |
| Gross profit / margin | $7.4 / 17.4% | Margin up from 14.8% | $22.2 / 18.8% | Margin up from 16.8% |
| Operating income / margin | $3.3 / 7.7% | Up 21% | $9.9 / 8.4% | Down 3% |
| Net income | $2.5 | Up 31% | $7.6 | Down 3% |
| Diluted EPS | $0.41 | Prior year $0.30 | $1.22 | Prior year $1.22 |
Quarterly revenue from private-label manufacturing fell 11% to $37.6 million, while patent and trademark licensing revenue rose 15% to $4.8 million. For the nine months, those segments were down 16% to $104.9 million and up 42% to $13.5 million, respectively. The largest manufacturing customer’s sales declined 40% in the quarter and 44% for the nine months; that customer represented 34% of nine-month sales, versus 54% a year earlier.
Quarterly gross margin improved mainly through favorable manufacturing sales mix and greater licensing contribution. Nine-month manufacturing margin was pressured by higher per-unit manufacturing costs, partly offset by mix. Licensing benefited from higher sales, new customers and pricing; a rebate-estimate change also contributed to the nine-month margin increase. Foreign-exchange expense was lower than in the prior-year periods.
Cash flow, balance sheet and capital resources
- Cash and cash equivalents were $18.6 million at March 31, 2022, down from $32.1 million at June 30, 2021. Current assets were $78.2 million and current liabilities $24.4 million, implying working capital of about $53.8 million.
- Operating activities used $3.1 million of cash in the nine months, compared with $16.0 million provided a year earlier. The principal working-capital use was a $9.8 million increase in inventory; accounts payable and accrued liabilities provided $4.4 million.
- Investing activities used $21.4 million, including $21.5 million of property and equipment purchases. NAI acquired a Carlsbad manufacturing and warehouse property for $17.5 million and plans to retrofit it for powder blending, packaging and storage.
- Financing activities provided $4.8 million, including a $10.0 million term loan, offset partly by $5.1 million of stock repurchases and debt payments.
- Debt included $9.8 million outstanding on the property term loan; no borrowings were outstanding on the $20.0 million revolving facility. The term loan is effectively fixed at 2.4% for its first three years through an interest-rate swap. The company reported covenant compliance and $20.0 million available under the line at quarter-end.
- Total assets were $135.5 million, total liabilities $50.4 million and stockholders’ equity $85.1 million at March 31, 2022. Inventory rose to $36.8 million from $27.0 million at June 30, 2021.
Outlook, risks and notable items
Management anticipated fiscal Q4 2022 net sales would increase 18%–21% versus Q4 2021 and operating income would reach 9%–12% of sales. It attributed the expected improvement to growth from a newer customer, stronger demand from the largest customer, improved mix and staffing. Management cautioned that the forecast was not assured. It expected cash, available credit and operating cash flows to cover working capital, capital expenditures and required debt payments for at least the next 12 months.
Key uncertainties include customer concentration and order variability; supplier concentration, including limited qualified beta-alanine sources; inflation in raw materials and labor; supply-chain and staffing constraints; COVID-19 effects; foreign-exchange and interest-rate movements; and potential effects of the Russia-Ukraine conflict on materials, shipping and European operations. NAI reported ordinary-course legal matters but did not expect them to have a material adverse effect based on information available. The filing reported no material pending legal proceeding as of May 12, 2022.
NAI repurchased $5.1 million of shares during the nine months and increased its repurchase authorization to $18.0 million. It also reported a $3.2 million net fair-value asset for derivative contracts at March 31, 2022. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Q4 sales and operating-margin guidance was achieved, and whether newer-customer growth and improved staffing translated into results.
- Whether the largest customer’s orders recovered and customer concentration continued to decline.
- Whether inventory levels converted into sales and operating cash flow improved after the substantial inventory build and facility investment.
- Progress, remaining cost and expected capacity benefits of retrofitting the Carlsbad facility, alongside the $15.0 million fiscal 2022 capital-expenditure limit under the credit agreement.
- Availability and cost of key raw materials, labor and freight, and any effects of geopolitical tensions, COVID-19 or currency movements.
- Continued covenant compliance, term-loan amortization and the company’s cash and liquidity needs while repurchases continue.