Natural Alternatives International, Inc. — Q2 FY2022 Form 10-Q
Business context and period. The filing covers the quarter and six months ended December 31, 2021. NAI manufactures private-label nutritional and health products and earns revenue from beta-alanine raw-material sales and CarnoSyn and SR CarnoSyn licensing. Amounts below are U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Net sales | $37.7m | $48.1m | $76.1m | $87.8m |
| Gross profit / margin | $6.5m / 17.4% | $9.7m / 20.1% | $14.8m / 19.5% | $15.7m / 17.9% |
| Operating income / margin | $2.4m / 6.4% | $5.4m / 11.2% | $6.6m / 8.7% | $7.5m / 8.5% |
| Net income / diluted EPS | $1.8m / $0.30 | $3.6m / $0.57 | $5.1m / $0.81 | $5.9m / $0.91 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $(0.6)m | $4.7m |
- For the quarter, sales declined 22%, gross profit declined 32%, and net income declined 49% year over year. Year-to-date sales declined 13% and net income declined 13%.
- Six-month cash used in investing was $19.6m, primarily reflecting the Carlsbad facility purchase; financing provided $7.4m, including $10.0m of term-loan borrowings and $2.5m of share repurchases.
- At December 31, cash and equivalents were $19.4m; current assets were $70.6m and current liabilities $16.5m. The company had $9.9m outstanding on the term note and no borrowings on its $20.0m revolving facility.
- Property and equipment, net, was $39.7m, up from $22.3m at June 30, 2021. Total liabilities were $43.0m; operating lease liabilities totaled $15.2m long term.
Material changes and management commentary
- Private-label manufacturing sales fell 26% in the quarter and 18% for the six months. Management attributed the decline primarily to the largest customer’s inventory reduction, especially in Europe. That customer’s six-month sales fell 46%; its share of total sales decreased from 56% to 35%.
- Patent and trademark licensing sales increased 47% in the quarter and 62% for the six months, reflecting reopened athletic activities and gyms, new customers, and higher average prices. Six-month licensing revenue was $8.8m.
- Quarterly gross margin fell 2.7 percentage points year over year, mainly from unfavorable manufacturing sales mix and higher per-unit manufacturing costs. The six-month gross margin rose 1.6 points, supported by licensing mix and pricing.
- Management forecast FY2022 sales flat to slightly higher than FY2021, with operating income of 8%–11% of sales. It expected second-half sales growth of 10%–13% year over year and operating margin of 8%–11%; these expectations depend on sales growth, improved mix, and staffing levels.
- NAI acquired a Carlsbad manufacturing and warehouse property for $17.5m in August 2021 and plans to retrofit it for powder blending, packaging, and storage. Management said available cash, its credit facility, and anticipated operating cash flows should cover working capital, capital expenditures, and minimum debt service for the next 12 months.
- NAI repurchased 189,702 shares in the quarter for $2.5m at an average cost of $13.32 per share. In January 2022, the board increased the total repurchase authorization to $18.0m.
Risks, contingencies, and unusual items
- COVID-19, supply-chain disruption, staffing shortages, supplier and carrier constraints, and customer demand or payment delays may affect operations, sales, margins, and cash flows. Management said the duration and financial impact could not be reliably estimated.
- Customer and supplier concentration remain important risks. Two customers represented 59.6% of gross receivables at December 31, 2021. NAI also relies on a limited number of qualified raw-material suppliers, including beta-alanine suppliers.
- The company was in compliance with its credit covenants at quarter-end. The facility includes financial covenants and capital-expenditure limits; the filing says the FY2022 limit is $15.0m, exclusive of the Carlsbad property purchase.
- Foreign-exchange activity was less adverse than in the prior-year periods. Cash-flow hedges had a net gain of approximately $1.6m, net of deferred taxes, in accumulated other comprehensive income; $1.1m was expected to be reclassified into earnings within 12 months. Litigation and patent-compliance costs were approximately $0.2m for the six months, versus $0.7m a year earlier.
- The six-month effective tax rate was 22.6%, compared with 7.2% a year earlier, which included discrete tax benefits. NAI reported ordinary-course legal matters but no material pending legal proceeding as of February 9, 2022, and did not expect their resolution to have a material adverse effect based on information then available.
- A February 2022 credit amendment increased the annual limit on stock repurchases and dividends from $5.0m to $7.0m. The filing also cautions that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether the largest manufacturing customer’s inventory reduction continues, and whether the forecast sales recovery and customer diversification materialize.
- Whether higher manufacturing costs, supply constraints, and staffing challenges affect margins and the FY2022 operating-income outlook.
- Cash generation after the facility purchase, remaining retrofit spending, covenant headroom, and debt-service requirements.
- The durability of licensing growth, access to qualified beta-alanine supply, and execution of SR CarnoSyn commercialization and intellectual-property protection.
- How share repurchases and the amended repurchase limit affect liquidity and outstanding shares.