Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended September 30, 2022. Comparisons are with the three months ended September 30, 2021 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
NAI primarily manufactures private-label nutritional supplements and also earns revenue from beta-alanine raw material sales and patent and trademark licensing, including CarnoSyn and SR CarnoSyn.
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $43.1 million | $38.3 million | +12% |
| Gross profit / margin | $5.4 million / 12.5% | $8.3 million / 21.6% | Profit down 35%; margin down 9.1 percentage points |
| Operating income / margin | $1.5 million / 3.6% | $4.2 million / 11.0% | Down 64% |
| Net income / diluted EPS | $1.1 million / $0.18 | $3.3 million / $0.51 | Net income down 68% |
| Cash from operations | $(4.6) million | $(3.8) million | Greater cash use |
| Capital expenditures | $7.8 million | $18.3 million | Lower, largely because prior-year spending included the Carlsbad property purchase |
Material changes and financial position
- Private-label manufacturing sales rose 24% to $41.8 million, primarily from higher sales to the two largest customers. Licensing revenue fell 72% to $1.4 million as orders weakened amid inflationary and market factors and a slowdown in sports nutrition.
- Manufacturing costs increased 26%, faster than sales. Management attributed lower manufacturing margins principally to higher labor and freight costs and unfavorable euro exchange rates. The prior-year licensing period also benefited from a favorable volume-rebate estimate not repeated this quarter.
- SG&A decreased 6% to $3.8 million. Other expense increased to $0.2 million, mainly due to unfavorable foreign-exchange revaluation and unhedged currency movements. The effective tax rate was 20.1%, versus 22.5%.
- Cash and cash equivalents were $12.3 million at September 30, down from $21.8 million at June 30, 2022. Inventory increased to $40.0 million from $32.5 million; operating cash use included a $7.5 million inventory build.
- Current assets were $74.4 million and current liabilities $26.8 million at quarter-end. Debt included $3.4 million drawn on the revolving credit facility and $9.7 million on the term note. The revolving facility had $16.6 million available; the company reported compliance with its covenants.
- Property and equipment rose to $51.4 million from $44.6 million, reflecting continued investment, including work on the new Carlsbad manufacturing and warehouse facility. The company repurchased 46,795 shares for approximately $497,000.
Outlook, risks and other notable items
- Management expects fiscal 2023 net sales to be slightly higher than fiscal 2022. It expects operating income to face pressure from sales mix, unfavorable foreign exchange, and inflation-related labor, raw-material, freight and supply-chain costs. These expectations are not assured.
- The planned high-volume powder blending and packaging facility was expected to become operational in mid-to-late fiscal 2023. Management said it would continue efforts to diversify customers, develop SR CarnoSyn markets, and manage costs and operational risks.
- Customer concentration remains significant: the largest customer represented 35% of quarterly sales, and the two largest customers together generated about $30.2 million. The filing warns that losing a major customer or supplier, or reduced orders or payment capacity, could materially affect results. Beta-alanine sourcing is also dependent on a limited number of qualified suppliers.
- COVID-19, supply-chain and staffing constraints, inflation, foreign exchange, customer demand, and the ability to pass through costs remain risks. Management said available cash, credit and potential operating cash flows should cover working capital, capital expenditures and minimum debt payments for the next 12 months.
- NAI reported ordinary-course legal matters but no material pending proceeding as of November 9, 2022, and did not believe their resolution would materially adversely affect the company based on information then available. The filing also notes that outcomes and costs could be worse than anticipated.
Important facts for investors to verify
- Whether manufacturing cost inflation and foreign-exchange headwinds continue to compress gross and operating margins.
- Whether licensing revenue recovers and whether the fiscal 2023 sales outlook is achieved, given weaker sports-nutrition demand.
- Inventory levels, conversion of inventory into sales and cash, and ongoing facility spending.
- Sales concentration and exposure to key customers and qualified raw-material suppliers.
- Cash usage, revolving-credit availability, debt covenant compliance, and progress and timing of the Carlsbad facility project.