Natural Alternatives International, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended December 31, 2022—fiscal Q2 and first half of fiscal 2023—compared with the same periods in fiscal 2022. NAI manufactures private-label nutritional and health products and earns additional revenue from beta-alanine raw-material sales and CarnoSyn and SR CarnoSyn licensing. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Three months ended Dec. 31, 2022 | Year-over-year | Six months ended Dec. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $42.3 | Up 12% | $85.4 | Up 12% |
| Gross profit / margin | $6.2 / 14.7% | $6.5 / 17.4% | $11.6 / 13.6% | $14.8 / 19.5% |
| Operating income / margin | $2.5 / 5.9% | $2.4 / 6.4% | $4.0 / 4.7% | $6.6 / 8.7% |
| Net income | $1.8 | Down 2% | $2.9 | Down 44% |
| Diluted earnings per share | $0.31 | Prior year $0.30 | $0.49 | Prior year $0.81 |
| Operating cash flow | Not separately presented | — | $3.7 | Prior year use of $0.6 |
For the six-month period, cash used in investing was $11.6 million, principally for improvements and equipment at the Carlsbad facility; cash used in financing was $1.2 million, including $1.1 million of share repurchases. Cash declined $9.1 million from June 30 to $12.8 million at December 31.
At December 31, current assets were $63.1 million and current liabilities $18.5 million. Total liabilities were $51.0 million and stockholders’ equity $89.5 million. Debt included $9.7 million outstanding on the Carlsbad term note; the $20 million revolving credit line had no balance drawn and was available. The company reported compliance with credit covenants.
Material changes versus the prior comparable periods
- Private-label manufacturing sales rose 21% in the quarter and 23% year to date, principally on higher sales to two major customers. Patent and trademark licensing sales fell 64% and 68%, respectively, amid fewer customer orders and a slowdown in sports nutrition.
- Higher sales did not translate into stronger first-half earnings: gross profit fell 22%, and operating income fell 39%. Management attributed margin pressure to increased unit costs, labor and freight expense, unfavorable currency effects, and a less favorable revenue mix. Licensing’s historically higher margins made its sales decline particularly consequential.
- Quarterly operating income increased 3%, supported in part by lower SG&A, including recovery of previously reserved receivables. First-half net income also reflected higher other expense, including foreign-exchange effects and interest expense.
- Cash from operations improved from a $0.6 million use to $3.7 million provided. Receivables provided $7.2 million of cash, while inventory used $3.6 million. Capital spending was lower than the prior year’s $19.6 million, which included the Carlsbad property purchase.
- Beta-alanine raw-material sales and royalty/licensing revenue were $1.5 million for the quarter and $2.8 million for the first half, versus $4.1 million and $8.8 million in the prior-year periods.
Outlook, commentary and risks
Management expects fiscal 2023 consolidated net sales to decrease slightly compared with fiscal 2022, based on current orders and customer forecasts. It expects operating income to be pressured by sales mix, unfavorable foreign exchange rates, inflation, labor, raw-material, freight and supply-chain costs, with greater impact anticipated in the second half. The company is evaluating cost reductions; no specific earnings or margin guidance was provided.
Management plans to continue developing customer relationships and CarnoSyn/SR CarnoSyn sales, improving efficiencies, and completing a high-volume powder blending and packaging facility, which it expected to be operational by late fiscal 2023. The company says available cash, the credit facility and expected operating cash flows should fund working capital, capital expenditures and debt service for at least 12 months.
- Customer concentration is significant: the largest customer represented 36% of first-half sales, up from 35% a year earlier; three customers together accounted for $71.1 million of first-half sales. Loss or reduced purchasing by major customers could materially affect results.
- NAI relies on a limited number of qualified suppliers for certain materials, including beta-alanine. It also faces foreign-exchange exposure and uses forward contracts and an interest-rate swap; hedge values can affect comprehensive income and reported results.
- COVID-19, supplier and staffing constraints, inflation, demand changes, facility completion and certification, and the availability and cost of raw materials are cited uncertainties. Routine legal matters were reported; management did not expect them to have a material adverse effect based on currently available information.
- The filing reports a $1.8 million after-tax quarterly unrealized loss on derivative instruments in other comprehensive income. The six-month derivative-related loss was $1.3 million; these amounts affected comprehensive income, not net income.
Important facts for investors to verify
- Whether major customers’ order patterns and the high sales concentration are sustainable, and whether customer diversification progresses.
- Whether the expected slight fiscal 2023 sales decline and second-half operating-income pressure are borne out, particularly as costs and exchange rates change.
- Whether the Carlsbad powder facility is completed and operational on schedule, and whether its capital spending supports capacity and margins.
- Whether licensing and beta-alanine demand recovers, and how supplier availability affects product sales and margins.
- Cash conversion, inventory levels, revolver availability, covenant compliance and the remaining term-note balance.
- Effectiveness and accounting impact of currency and interest-rate hedges, and developments in ordinary-course legal matters.