Business context and reporting period
Natural Alternatives International, Inc. (NAI; Nasdaq: NAII) filed this Form 10-K for the fiscal year ended June 30, 2021, with fiscal 2020 as the comparable period. Although the request metadata refers to “2020 Q4,” the filing reports annual fiscal 2021 results, not standalone fourth-quarter results. NAI manufactures private-label nutritional supplements and sells and licenses beta-alanine under its CarnoSyn and SR CarnoSyn brands.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $178.5 million | $118.9 million |
| Gross profit / margin | $30.4 million / 17% | $18.9 million / 16% |
| Operating income (loss) | $13.7 million / 8% of sales | $(1.5) million |
| Net income (loss) | $10.8 million; diluted EPS $1.69 | $(1.6) million; diluted EPS $(0.25) |
| Cash from operating activities | $20.8 million | $3.7 million |
- Contract manufacturing sales were $164.3 million, up 55%; patent, trademark and beta-alanine sales and licensing revenue was $14.2 million, up 13%.
- Gross margin improved by 1.2 percentage points. Contract manufacturing margin benefited from lower per-unit costs as volume rose and the absence of a prior-year $1.0 million inventory reserve; product and customer mix partly offset the improvement.
- SG&A decreased 18% to $16.8 million, mainly reflecting no comparable repeat of $3.3 million in prior-year bad-debt expense, plus lower patent-related and CarnoSyn advertising costs.
- Other expense was $1.5 million, including a $1.4 million foreign-exchange loss. The effective tax rate was 11.3%.
- At June 30, 2021, cash and equivalents were $32.1 million; current assets were $80.3 million and current liabilities $22.1 million. Debt under the credit line was zero, with $20.0 million available. Operating lease liabilities totaled $16.5 million long-term and $15.9 million of lease right-of-use assets were recorded.
- Capital expenditures were $5.1 million. NAI repurchased $4.1 million of stock during the year. Operating cash flow substantially exceeded net income; cash used in financing included repayment of the $10.0 million pandemic-related borrowing and share repurchases.
Material changes and unusual items
- Sales increased 50%, driven by broad contract manufacturing growth, including immune and wellness products, and newly awarded products. The largest customer accounted for 51% of sales, up from 44%; a second customer represented 14%.
- CarnoSyn revenue rose 13%. Management said second-half shipments included larger-than-usual channel-restocking orders as gyms and athletic facilities reopened, and expected those sales to normalize in fiscal 2022.
- NAI recovered $0.8 million related to former customer Kaged Muscle. A $3.5 million fully reserved receivable from that customer remained on the balance sheet at year-end.
- Patent litigation and compliance expenses were approximately $1.2 million, down from $2.0 million in fiscal 2020. NAI expected $0.5–$1.0 million in fiscal 2022.
- After year-end, NAI bought a Carlsbad manufacturing and warehouse property for $17.5 million, using a $10.0 million term loan and cash for the balance and closing costs. The facility is planned for high-volume powder blending and packaging after retrofit. The credit facility was amended to add the term loan to the existing $20.0 million revolving capacity.
Outlook, risks and contingencies
Management forecast fiscal 2022 net sales growth of 5%–10% and operating income of 7%–9% of sales. It anticipated lower sales and profitability in the first half because of supply-chain, labor and logistics constraints, with order backlogs potentially not fully cleared until the second half. Management expected these challenges to mostly ease in the second half, but cautioned that COVID-19 effects and the forecast were uncertain.
- Key risks include dependence on a small number of customers, supply-chain and labor constraints, higher raw-material, transportation and labor costs, potential tariffs, and COVID-19 disruption. One supplier accounted for 24% of raw-material purchases in fiscal 2021; NAI sources all beta-alanine from a single supplier.
- Patent durability and commercialization are material uncertainties: instant-release CarnoSyn patents extend through 2026 and SR CarnoSyn patents through 2036, but market acceptance of the sustained-release product is not assured.
- NAI reported no material pending legal proceeding as of September 20, 2021, while noting ordinary-course matters and that unfavorable outcomes remain possible. The filing identifies no significant off-balance-sheet arrangements.
- The independent auditor issued an unqualified opinion on the financial statements and identified revenue recognition as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an ICFR attestation.
Important facts for investors to verify
- Whether fiscal 2022 growth and operating-margin guidance was achieved, particularly after the anticipated first-half slowdown.
- How much of fiscal 2021’s sales growth and CarnoSyn increase reflected sustainable demand versus pandemic-related demand and customer restocking.
- Customer concentration, including the largest customer’s 51% sales share, and progress in diversifying revenue.
- Supply availability, labor capacity, cost inflation and tariff exposure—and their effects on margins and backlog conversion.
- The Carlsbad facility’s retrofit cost, completion timing, financing terms and utilization; also monitor debt and compliance with amended loan covenants.
- Collection prospects for the fully reserved $3.5 million former-customer receivable and continuing patent protection and litigation costs.