Natural Alternatives International, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2022 first quarter, three months ended September 30, 2021; compared with the three months ended September 30, 2020. Dollar amounts are U.S. dollars.
Business context and results
NAI provides private-label contract manufacturing of nutritional and health products and sells beta-alanine raw materials and related patent and trademark licenses, including CarnoSyn and SR CarnoSyn. The company reports these as two segments.
- Net sales: $38.34 million, down 3% year over year. Contract manufacturing sales were $33.59 million, down 9%; patent and trademark licensing sales were $4.75 million, up 77%.
- Profitability: Gross profit was $8.28 million, up 38%, and gross margin rose to 21.6% from 15.1%. Operating income was $4.23 million, up 103%, with an 11.0% operating margin versus 5.2%. Net income was $3.26 million, up 44%; diluted EPS was $0.51 versus $0.35.
- Cash flow: Operating activities used $3.78 million, versus $0.11 million provided in the prior-year quarter. Investing activities used $18.32 million, primarily for the Carlsbad facility purchase; financing provided $9.99 million, including $10 million of term-loan proceeds. Cash declined by $12.11 million to $20.03 million.
- Liquidity and debt: Current assets were $75.24 million and current liabilities $20.62 million. The company had $10 million outstanding on a seven-year term loan and the full $20 million revolving facility available. It reported compliance with credit covenants. The term loan’s effective rate is fixed at 2.4% for its first three years through an interest-rate swap.
- Other balance-sheet measures: Total assets were $132.16 million, including $31.71 million in inventory; total liabilities were $47.66 million and stockholders’ equity $84.51 million.
Material changes and unusual items
- Sales to the largest manufacturing customer fell 45%, mainly because of an inventory-reduction program associated largely with its European business. That customer represented 35% of quarterly sales, down from 60% a year earlier; increased business from other customers and a new customer partly offset the decline.
- Licensing growth reflected higher shipments as athletic activities and gyms reopened, new customers, and higher average selling prices. Patent and trademark licensing operating income increased to $2.64 million from $0.67 million.
- Gross-margin improvement reflected favorable mix in both segments, higher licensing prices, and a change in estimate for certain volume rebates; manufacturing unit costs increased marginally.
- In August 2021, NAI acquired a Carlsbad manufacturing and warehouse property for $17.5 million, financed in part with the $10 million term loan. It plans to retrofit the site for powder blending, packaging, storage, and office use.
- Prior-year tax results included discrete tax benefits; this quarter’s tax provision was $0.95 million, compared with a $0.49 million tax benefit in the prior-year quarter. The current-quarter effective tax rate was 22.5%.
- Cash-flow hedge fair-value changes produced a $0.95 million after-tax unrealized gain in other comprehensive income. The company reported a net $1.6 million fair-value asset for Euro and Swiss Franc forward contracts.
Outlook, commentary, and risks
Management expects fiscal 2022 net sales to increase 7%–10% over fiscal 2021 and operating income to equal 10%–13% of net sales. It expects first-half sales and profitability to decline year over year, with supply-chain, labor, and logistics constraints contributing to order backlog; management expects these challenges to mostly ease in the second half and anticipates stronger second-half results. These are expectations, not assurances.
Risks highlighted include COVID-19 disruption, labor availability, supply-chain and shipping constraints, customer order timing and concentration, dependence on a limited number of qualified suppliers (including for beta-alanine), foreign-exchange exposure, and the ability to commercialize SR CarnoSyn and protect intellectual property. Management believes available cash, the credit facility, and expected operating cash flows will fund working capital, capital spending, and required debt payments for at least the next 12 months. It also cautions that the quarter’s results are not necessarily indicative of full-year performance.
NAI reported no material pending legal proceeding as of November 9, 2021, while noting ordinary-course matters and the possibility of adverse outcomes. Management concluded disclosure controls were effective as of September 30, 2021.
Most important facts for investors to verify
- Whether customer orders recover as expected, and whether the largest customer’s reduced purchasing is temporary; four customers each exceeded 10% of quarterly sales.
- Whether supply, labor, and logistics constraints clear in the second half of fiscal 2022 and the stated annual sales and operating-margin outlook is achieved.
- Expected retrofit costs, timing, and capacity benefits from the Carlsbad property, alongside the quarter’s substantial capital spending and negative operating cash flow.
- Inventory growth, receivables collection, customer and supplier concentration, and the adequacy of liquidity under changing operating conditions.
- Beta-alanine licensing growth, volume-rebate estimates, foreign-currency hedge results, and continuing COVID-19, litigation, and intellectual-property risks.