Natural Alternatives International, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended June 30, 2023, compared with fiscal 2022. Although the request metadata references 2022 Q4, this filing reports annual FY2023 results, not a standalone quarter.
Business context
NAI manufactures private-label nutritional supplements and sells and licenses beta-alanine under its CarnoSyn and SR CarnoSyn trademarks. It operates manufacturing facilities in California and Switzerland. Private-label contract manufacturing generated 94% of FY2023 sales; patent and trademark licensing and related raw-material sales generated 6%.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $154.0 million | $171.0 million |
| Gross profit / gross margin | $18.2 million / 11.8% | $30.5 million / 17.8% |
| Operating income / operating margin | $4.7 million / 3.1% | $13.7 million / 8.0% |
| Net income / diluted EPS | $2.5 million / $0.43 | $10.7 million / $1.74 |
| Operating cash flow | $7.0 million | $11.9 million |
| Capital expenditures | $13.5 million | $26.5 million |
- Sales declined 10%. Contract manufacturing sales fell 6% to $145.3 million; licensing and related sales fell 46% to $8.7 million.
- Gross margin contracted by about 6.1 percentage points amid lower sales, unfavorable mix, higher labor and operating costs, and a lower contribution from higher-margin licensing revenue. A $2.2 million Employee Retention Tax Credit (ERTC) benefit offset contract manufacturing costs.
- Cash and cash equivalents were $13.6 million at year-end, down from $21.8 million. Current assets were $57.0 million and current liabilities $15.9 million. Operating cash flow was more than offset by investment spending and financing uses.
- Debt included a $9.5 million term loan; no revolving-credit balance was outstanding, and $20.0 million remained available at June 30, 2023. The term loan is secured and its effective rate was fixed at 2.4% for its first three years through an interest-rate swap.
Changes, outlook, and risks
- The largest customer accounted for 40% of FY2023 sales, up from 32% in FY2022. The two largest customers together represented approximately 71% of sales.
- Management attributed lower contract-manufacturing sales primarily to customers reducing excess inventory and to foreign-exchange effects. The largest customer’s sales to NAI rose 66% during FY2023, but that customer’s subsequent inventory imbalance prompted a key operating change.
- In August 2023, NAI announced temporary closure of its new Carlsbad powder-processing facility because of that major customer’s excess inventory. NAI expected operations to resume late in FY2024’s third quarter, but gave no assurance on timing or future order levels; employees could be furloughed.
- Management anticipated a net loss in the first half of FY2024, income in the second half, and an overall FY2024 net loss. A longer closure or weaker-than-forecast sales could further reduce revenue.
- NAI expected ongoing inflationary pressure on raw materials, packaging, labor, freight, utilities, and other costs. Beta-alanine comes from a single Japanese manufacturer, and supply constraints, tariffs, or price increases could affect the business.
- Despite compliance with loan covenants at June 30, 2023, management expected it might fail to meet covenants in FY2024’s second quarter due to weaker sales and the facility closure. NAI had notified Wells Fargo and was negotiating a revised credit facility; the outcome was uncertain.
- Other notable items: NAI recognized an expected $3.5 million ERTC refund for eligible 2021 quarters, including $2.2 million recorded against cost of goods sold and $1.3 million against SG&A. A $1.4 million recovery from a former customer also reduced expenses. Foreign-exchange and interest-related costs increased.
- Key risks include customer concentration, supplier dependence, regulatory compliance, product liability, competition, patent protection and currency exposure. No material pending legal proceedings were reported. The auditor issued an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting, without an auditor attestation on internal controls.
Most important facts for investors to verify
- Whether the major customer’s inventory rebalancing concludes as expected, and whether Carlsbad reopens on schedule with sufficient orders.
- Whether NAI obtains a revised Wells Fargo facility and secures covenant relief before the anticipated FY2024 covenant shortfall.
- How much of the $3.5 million ERTC receivable is collected, and whether any eligibility or timing uncertainty arises.
- Whether sales concentration, raw-material availability, inflation, and foreign-exchange effects improve or continue to pressure revenue and margins.
- Whether FY2024 results track management’s forecast of first-half losses, second-half income, and a full-year loss.