Natural Alternatives International, Inc. (NAII) is a leading provider of private-label contract manufacturing services and innovative nutritional supplements. The company has a rich history of delivering high-quality products to its customers, while also leveraging its patent portfolio to drive growth in its proprietary beta-alanine offerings. Despite facing headwinds in its private-label business, NAII remains focused on diversifying its revenue streams and investing in research and development to capitalize on emerging wellness trends.

NAII operates in two primary business segments: private-label contract manufacturing and patent and trademark licensing. The private-label contract manufacturing segment provides manufacturing services to companies that market and distribute vitamins, minerals, herbal and other nutritional supplements, as well as other health care products. This segment has historically been the company's primary revenue driver, accounting for 77% of total net sales in fiscal 2023.

The patent and trademark licensing segment generates revenue from the sale of raw materials, as well as royalties and licensing fees associated with the company's patented beta-alanine ingredient, marketed under the CarnoSyn® and SR CarnoSyn® trade names. This segment has become an increasingly important part of NAII's business, contributing 23% of total net sales in fiscal 2023.

Financials

In fiscal 2023, NAII reported annual net sales of $154,015,000, a decrease of 5% compared to the prior year. Net income for the year was $2,522,000, down from $3,280,000 in the previous year. Operating cash flow was $7,019,000, while free cash flow was negative $6,505,000 due to increased capital expenditures.

For the first nine months of fiscal 2024, NAII's net sales declined 29% to $84,307,000, compared to $118,121,000 in the same period of the prior year. The company reported a net loss of $5,343,000 for the first nine months of fiscal 2024, compared to net income of $485,000 in the prior-year period. Operating cash flow was $1,220,000, while free cash flow was negative $763,000.

The decline in net sales and profitability was primarily driven by reduced orders from several of NAII's larger private-label contract manufacturing customers, as they worked to reduce excess inventory. This was partially offset by increased sales in the patent and trademark licensing segment, which grew 28% year-over-year during the first nine months of fiscal 2024.

Geographical Breakdown

NAII's products are sold both in the United States and in international markets, including Europe, Canada, Australia, New Zealand, Mexico, and Asia. During the first nine months of fiscal 2024, 68% of net sales in markets outside the U.S. were generated by the company's Swiss subsidiary, NAIE.

Segment Performance

Private-label Contract Manufacturing

The private-label contract manufacturing segment experienced a 31% decline in net sales during the first nine months of fiscal 2024, compared to the same period in the prior year. This was primarily due to reduced orders from several of NAII's larger customers as they worked to reduce excess inventory. Gross profit margin in this segment decreased from 11.0% in the first nine months of fiscal 2023 to 6.5% in the first nine months of fiscal 2024, due to lower sales, unfavorable sales mix, and increased per unit manufacturing costs.

Patent and Trademark Licensing

The patent and trademark licensing segment saw a 28% increase in net sales during the first nine months of fiscal 2024, compared to the same period in the prior year. This growth was driven by an increase in orders from existing customers and higher royalty income. Gross profit margin in this segment increased from 28.8% in the first nine months of fiscal 2023 to 39.3% in the first nine months of fiscal 2024, due to the higher-margin nature of this business.

Liquidity

As of March 31, 2024, NAII had $12.4 million in cash and cash equivalents, with no outstanding balance on its $12.5 million revolving credit facility. The company's current ratio was 3.98, and its quick ratio was 2.44, indicating a strong liquidity position.

During the first nine months of fiscal 2024, NAII generated $1,220,000 in operating cash flow and used $1,983,000 in capital expenditures, resulting in negative free cash flow of $763,000. The company's capital expenditures were primarily related to manufacturing equipment and solar power generation projects at its facilities in California.

Risks and Challenges

NAII faces several risks and challenges that could impact its future performance. The company's revenue is heavily dependent on a small number of large customers, with its top three customers accounting for 58% of net sales in the first nine months of fiscal 2024. The loss of any of these customers or a significant decline in their orders could have a material adverse effect on the company's financial results.

Additionally, NAII relies on a limited number of suppliers for certain key raw materials, such as beta-alanine, which could disrupt its operations if supply is interrupted or if the suppliers fail to meet the company's quality standards. The company also faces competition from other contract manufacturers and providers of nutritional supplements, which could put pressure on pricing and margins.

Outlook

For the remainder of fiscal 2024, NAII expects to continue facing challenges in its private-label contract manufacturing segment due to the inventory rebalancing efforts of its larger customers. However, the company remains focused on diversifying its revenue streams and investing in research and development to drive growth in its patent and trademark licensing business.

NAII is actively working to expand the commercialization of its beta-alanine patent estate through raw material sales, developing new sales channels for its SR CarnoSyn® sustained release beta-alanine, and pursuing additional contract manufacturing and licensing opportunities. The company believes these initiatives, combined with its efforts to improve operational efficiency and manage costs, will position it for long-term growth and profitability.

Conclusion

Natural Alternatives International, Inc. is navigating a challenging period in its private-label contract manufacturing business, but the company's diversification efforts and focus on innovation provide a path forward. By leveraging its patent portfolio and investing in new product development, NAII is working to reduce its reliance on a small number of large customers and capitalize on emerging trends in the wellness and healthy aging markets. While the near-term outlook remains uncertain, the company's strong liquidity position and strategic initiatives suggest it is well-positioned to weather the current storm and emerge as a more resilient and diversified business.