Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2023 (the third quarter of fiscal 2023), compared with the periods ended March 31, 2022. This differs from the request metadata’s “2022 Q3.”
Business context and financial performance
NAI provides private-label contract manufacturing of nutritional and health products and earns revenue from beta-alanine raw-material sales, royalties and licensing under its CarnoSyn® and SR CarnoSyn® brands. Amounts below are in U.S. dollars.
| Metric | Quarter ended March 31, 2023 | Quarter ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Net sales | $32.7 million | $42.4 million | $118.1 million | $118.4 million |
| Gross profit / margin | $1.4 million / 4.2% | $7.4 million / 17.4% | $13.0 million / 11.0% | $22.2 million / 18.8% |
| Operating income (loss) | ($2.5 million) | $3.3 million | $1.5 million | $9.9 million |
| Net income (loss) | ($2.4 million) | $2.5 million | $0.5 million | $7.6 million |
| Diluted EPS | ($0.41) | $0.41 | $0.08 | $1.22 |
| Operating cash flow | Not separately reported for the quarter | ($0.5 million) | $3.1 million |
For the quarter, contract manufacturing sales fell 19% and licensing sales fell 51% year over year. For the nine-month period, contract manufacturing sales rose 8%, while licensing sales fell 62%. The nine-month licensing decline reflected reduced customer orders, inflationary and market pressures, and a slowdown in sports nutrition.
Liquidity, debt and capital resources
- At March 31, 2023, cash and cash equivalents were $15.6 million; current assets were $66.3 million and current liabilities were $25.6 million.
- Debt included $9.1 million outstanding on the working-capital line of credit and $9.6 million on the Carlsbad property term note. The company had $10.9 million of remaining borrowing availability under its $20 million revolving facility.
- NAI reported compliance with all credit-facility covenants. The revolving facility maturity was extended to May 23, 2025.
- Nine-month investing cash outflow was $13.2 million, mainly capital spending on the Carlsbad manufacturing facility; financing provided $7.4 million. Cash declined by $6.3 million from June 30, 2022.
- Management said available cash, facility availability and anticipated operating cash flows should fund working capital, capital expenditures, and minimum debt and interest payments for the next 12 months.
Material changes, outlook and risks
- Management attributed weaker near-term demand to customer excess inventory, softening consumer demand and improving supply-chain availability. Foreign-exchange movements also reduced reported sales and margins.
- Higher labor, utilities, freight, operating-supply and other costs, together with unfavorable sales mix and lower licensing revenue, pressured gross margin. Quarterly operating results included $449,000 of workforce-restructuring charges.
- In March 2023, NAI eliminated 32 positions, about 9% of its global workforce, and expects approximately $1.8 million of annualized operating-expense savings.
- Management forecast fiscal 2023 consolidated sales to decline 10%–12% from fiscal 2022, while expecting fourth-quarter sales to rise versus the third quarter and net operating income for both the fourth quarter and full fiscal year. It cautioned that mix, foreign exchange, inflation and operating costs could weigh on results; these expectations are not assured.
- The new high-volume powder blending and packaging facility was fully opened in April 2023 and began commercial production that month. Management expected remaining fiscal-year capital expenditures to be minimal.
- Customer concentration remains material: the largest customer represented 40% of nine-month sales, versus 34% in the prior-year period. NAI also disclosed dependence on a limited number of qualified suppliers for certain raw materials, including beta-alanine.
- Other stated risks include customer order variability, raw-material availability and quality, foreign exchange, litigation and regulatory matters, and possible COVID-19 effects. No material pending legal proceeding was reported as of May 12, 2023; management did not believe ordinary-course matters were likely to have a material adverse effect based on information then available.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is for the quarter ended March 31, 2023, not a 2022 third quarter.
- Track whether customer inventory reductions ease, and whether the largest customer’s elevated sales concentration persists.
- Compare subsequent results with the fiscal 2023 sales and operating-income outlook and assess whether restructuring savings are realized.
- Monitor gross-margin recovery, licensing demand, labor and input costs, foreign-exchange effects, and the new facility’s production ramp.
- Review cash generation, working-capital needs, borrowing availability and continued compliance with credit covenants.