Natural Alternatives International, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022; comparisons are with fiscal 2021. This is an annual filing, not a standalone fourth-quarter report. NAI manufactures private-label nutritional supplements and sells/licenses beta-alanine under its CarnoSyn and SR CarnoSyn brands.
Financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $171.0 million | $178.5 million | Down 4% |
| Gross profit / margin | $30.5 million / 17.8% | $30.4 million / 17.1% | Margin up 0.8 percentage points |
| Operating income / margin | $13.7 million / 8.0% | $13.7 million / 7.7% | Essentially flat |
| Net income | $10.7 million | $10.8 million | Down 1% |
| Diluted EPS | $1.74 | $1.69 | Up 3% |
| Cash from operations | $11.9 million | $20.8 million | Down $8.9 million |
| Cash and cash equivalents at year-end | $21.8 million | $32.1 million | Down $10.3 million |
Private-label manufacturing sales were $154.8 million, down 6%; patent, trademark, royalty and raw-material sales were $16.2 million, up 14%. The latter segment’s operating income increased to $6.8 million from $4.4 million, while contract-manufacturing operating income declined to $15.7 million from $17.7 million. SG&A was broadly flat at $16.8 million. Net income was nearly unchanged despite higher income-tax expense ($2.9 million versus $1.4 million); FY2021 included discrete tax benefits. The effective tax rate rose to 21.6% from 11.3%.
Liquidity, debt and investment
- Current assets were $76.7 million and current liabilities $23.3 million at June 30, 2022; the resulting current ratio was approximately 3.3.
- NAI had $9.8 million outstanding on a term loan used toward the Carlsbad facility purchase, no revolver borrowings, and $20.0 million available under its revolving credit facility. It reported compliance with all credit covenants.
- Operating cash flow fell partly as inventory absorbed $5.5 million of cash, compared with a $1.0 million source in FY2021. Investing used $26.5 million, primarily for the Carlsbad property and improvements. The $17.5 million facility purchase was partly financed by a $10.0 million term loan.
- The company reported sufficient cash, expected operating cash flows and credit availability to fund working capital and capital expenditures for at least 12 months. It held $17.8 million of cash at its Swiss subsidiary.
Material changes and management outlook
- Sales to the largest manufacturing customer fell 40%, largely because of that customer’s inventory reduction, particularly in Europe. Its share of total sales fell to 32% from 51%. The three largest customers together accounted for approximately 72% of FY2022 sales.
- Management attributed higher beta-alanine revenue to new customers, higher average selling prices, and stronger shipments as gyms and athletic activities reopened. It cautioned that some orders reflected customer distribution-channel restocking and expected sales to normalize toward historical trends in FY2023.
- Management forecast FY2023 net sales growth of 10%–15% and operating income of 5%–7% of sales, while anticipating increased labor, supply-chain and other inflationary costs. It expected positive FY2023 net income, but gave no assurance these expectations would be met.
- The Carlsbad facility, acquired in August 2021, was being converted for high-volume powder blending and packaging and additional raw-material storage; operations were expected to begin around mid-FY2023. Management also planned to sell Perfect Synergy directly through the SustainedRx website by FY2023’s second quarter.
Risks, contingencies and unusual items
- Supply constraints, higher raw-material, labor, transport and energy costs, tariffs, and inflation could pressure margins. Beta-alanine is sourced from a single Japanese manufacturer; one supplier represented 17% of raw-material purchases in FY2022.
- Customer concentration is substantial; changes in major customers’ orders, demand or payment capacity could materially affect results. The company also faces labor shortages that have reduced U.S. manufacturing efficiency.
- COVID-19 disruption and geopolitical uncertainty, including the Russia-Ukraine conflict, may affect supply, costs, foreign exchange and operations. Foreign-market regulation, product safety claims, and intellectual-property challenges are additional risks.
- CarnoSyn instant-release patents extend through 2026 and SR CarnoSyn patents through 2036. Management reported approximately $0.2 million of patent litigation and compliance expense in FY2022 and expected similar expense in FY2023. No material legal proceeding was pending as of September 21, 2022; ordinary-course matters remained possible.
- Foreign-exchange derivatives produced a reported $2.2 million after-tax unrealized gain in comprehensive income for FY2022. The company also recognized a favorable foreign-exchange result in earnings compared with a $1.4 million loss in FY2021.
- The independent auditor issued an unqualified opinion on the financial statements and identified revenue recognition as a critical audit matter. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor was not required to attest to internal-control effectiveness.
Important facts for investors to verify
- Whether FY2023 sales and operating-margin guidance was achieved, and how much growth depended on customer restocking versus recurring demand.
- Whether major-customer concentration continues to decline and whether new customers meaningfully diversify revenue.
- Whether inflation, labor availability and supply constraints affected gross margins, inventory and cash conversion.
- Whether the Carlsbad facility became operational on schedule, within budget and at sufficient utilization.
- Beta-alanine supply continuity, patent protection and market acceptance of SR CarnoSyn, along with the effect of the 2026 CarnoSyn patent horizon.
- Liquidity and covenant headroom, including the term-loan balance and availability or renewal of the revolving facility, which matures in May 2024.