Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2024 (fiscal 2024 third quarter). The filing was signed May 14, 2024. The company manufactures private-label nutritional and health-care products and earns revenue from beta-alanine sales, royalties and licensing under its CarnoSyn and SR CarnoSyn brands.
Financial performance
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Net sales | $25.1 million | $32.7 million | $84.3 million | $118.1 million |
| Gross profit / margin | $1.9 million / 7.6% | $1.4 million / 4.2% | $5.4 million / 6.5% | $13.0 million / 11.0% |
| Operating income (loss) | $(2.0) million | $(2.5) million | $(6.0) million | $1.5 million |
| Net income (loss) | $(1.6) million | $(2.4) million | $(5.3) million | $0.5 million |
| Diluted earnings (loss) per share | $(0.27) | $(0.41) | $(0.91) | $0.08 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $1.2 million | $(0.5) million |
- Revenue mix: Contract manufacturing sales fell 26% in the quarter and 31% for nine months, to $22.5 million and $77.7 million, respectively. Patent and trademark licensing sales rose 13% and 28%, to $2.7 million and $6.6 million.
- Balance sheet at March 31, 2024: Cash and equivalents were $12.4 million; total assets $153.2 million; total liabilities $69.1 million; and stockholders’ equity $84.1 million. Inventory was $21.1 million, down from $29.7 million at June 30, 2023.
- Debt and liquidity: The company had $9.3 million outstanding on its term note and no balance on its revolving line. Available line capacity was $6.4 million under amended terms. Management said cash, expected operating cash flows and the facility should fund working capital and capital expenditures for at least 12 months.
- Cash flows and investment: Nine-month investing cash outflow was $2.0 million, versus $13.2 million a year earlier; financing cash outflow was $0.4 million, versus $7.4 million of inflow. Cash declined $1.2 million from June 30, 2023. Capital expenditures were $2.0 million.
Material changes versus prior comparable periods
- Lower orders from larger manufacturing customers seeking to reduce excess inventories drove the sales decline. Increased shipments to other existing and new customers partly offset the decrease.
- Quarterly gross margin improved year over year, partly because the prior-year quarter included $0.3 million of workforce restructuring costs. For the nine-month period, gross margin declined as lower sales, unfavorable mix, higher labor, rent and utility costs, and costs associated with the temporarily closed Carlsbad facility weighed on results.
- Quarterly net loss narrowed, but the nine-month result shifted from prior-year income to a loss. SG&A was essentially unchanged in dollars, increasing as a percentage of lower sales.
- Operating cash flow improved to positive $1.2 million, aided in part by an $8.6 million cash release from inventory. Receivables used $4.2 million of cash, primarily reflecting the timing of sales and collections.
Outlook, management commentary and risks
- Management anticipates a net loss in fiscal 2024’s fourth quarter and an overall net loss for fiscal 2024. It announced that the Carlsbad high-speed powder-processing facility, temporarily closed in October 2023, would reopen in May 2024.
- The largest customer represented 42% of nine-month sales, compared with 40% in the prior-year period. Management expects the largest-customer concentration for fiscal 2024 to be flat to slightly higher than in fiscal 2023. The filing warns that losing a major customer or a significant reduction in its orders could materially affect results.
- The company disclosed prior credit-covenant noncompliance, including at December 31, 2023. A February 2024 amendment waived prior instances and changed borrowing capacity, pricing and covenants. It also limits capital expenditures to $6.5 million per fiscal year, requires suspension of share repurchases and dividends, and imposes a 10% availability reserve until profitability returns. The company reported compliance at March 31, 2024; future borrowing eligibility depends on meeting specified financial tests.
- Operating lease liabilities rose following a Vista facility lease extension; the related right-of-use asset and liability each increased by approximately $25.9 million. The extended lease term begins April 1, 2024, and management plans substantial facility improvements.
- Management cites customer and supplier concentration, limited qualified sources for certain raw materials including beta-alanine, foreign-exchange exposure, labor and input costs, and geopolitical risks. Israel is a small sales market, but the company sources some raw materials there; it is evaluating alternate sources and safety-stock options. It also monitors effects of conflicts in the Middle East and Ukraine on supply chains, shipping costs and markets.
- The company is developing SR CarnoSyn for wellness and healthy-aging markets and continuing related research, sales and marketing. Future licensing growth depends on market adoption, supply availability, intellectual-property protection and licensee compliance.
- Ordinary-course legal matters are disclosed, but as of May 14, 2024 the company reported no material pending legal proceedings. Management said it did not expect resolution of known matters to materially harm the business, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether the Carlsbad facility reopened as planned and whether customer orders and utilization recover enough to improve manufacturing margins.
- How customer concentration and inventory-rebalancing activity evolve, particularly for the largest customer.
- Whether the company meets amended lender covenants and retains the stated $6.4 million of available borrowing capacity; confirm the facility’s restrictions and maturity.
- Whether operating cash flow remains adequate as receivables, inventory and customer demand change, and whether planned facility investments remain within credit-agreement limits.
- Progress in expanding higher-margin CarnoSyn and SR CarnoSyn revenue, alongside beta-alanine supply availability and patent or licensing risks.
- The cost and timing of Vista facility improvements, including the planned solar installation and landlord reimbursement, and the effect of the extended lease obligations on liquidity.