Lifeway Foods, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Lifeway makes and sells cultured dairy products, principally drinkable kefir. Unless otherwise stated, financial amounts below are in millions of dollars; the filing reports amounts in thousands.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $40.896 | $38.140 | $118.030 | $105.730 |
| Gross profit / margin | $11.143 / 27.2% | $7.588 / 19.9% | $30.649 / 25.9% | $18.865 / 17.8% |
| Operating income / margin | $5.039 / 12.3% | $1.195 / 3.1% | $11.242 / 9.5% | $0.387 / 0.4% |
| Net income | $3.412 | $0.983 | $7.398 | $0.208 |
| Diluted EPS | $0.23 | $0.06 | $0.49 | $0.01 |
- Q3 sales rose 7.2%; nine-month sales rose 11.6%. Management attributed growth primarily to higher volumes of branded drinkable kefir, and secondarily to price increases implemented in Q4 2022.
- Drinkable kefir excluding ProBugs accounted for 81% of Q3 sales and 80% of nine-month sales.
- Management attributed improved gross margins to higher branded-product volumes, favorable milk pricing, prior price increases and lower transportation costs. Q3 total operating expenses were $6.104 million versus $6.393 million; nine-month operating expenses were $19.407 million versus $18.478 million.
- Effective tax rates were 30.8% for Q3 and 32.5% for the nine-month period, compared with 11.7% and negative 0.8%, respectively, in 2022. The filing cites nondeductible items and the difference in pretax income as factors affecting comparison.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $12.144 million, versus $3.639 million in 2022. Investing cash outflow was $3.206 million, including $3.146 million of property and equipment purchases; financing cash outflow was $0.750 million for term-loan principal payments.
- Cash at September 30 was $12.632 million, compared with $4.444 million at December 31, 2022. Current assets were $36.929 million and current liabilities were $16.407 million.
- At September 30, the company had $2.777 million drawn on its revolving credit facility, with $2.223 million available, and $2.981 million of term-loan debt net of financing costs. Reported debt interest rates were 7.34% on the revolver and 7.40% on the term loan.
- On October 6, 2023, Lifeway repaid the $2.777 million revolver balance; no revolver borrowings were outstanding through the filing date. The term loan was due August 2026, and the revolver facility was scheduled to mature June 2025.
- The company said it complied with its fixed-charge coverage and minimum working-capital covenants at September 30. Management described liquidity as strong and expected operating cash flow, available credit and cash to support operations, capital needs and growth initiatives.
Changes, outlook and risks
- Management reported some moderation in inflation and declines in certain input costs, including milk, but expected inflationary pressures to persist through 2023 at lower levels than in 2022. It reported no significant supply-chain or labor shortages and said production was full at all locations.
- The filing gives no specific revenue, earnings or margin guidance. Forward-looking statements are subject to risks including commodity-price changes, customer and competitor actions, execution of strategy, regulation, and supply-chain, manufacturing or distribution disruptions, including cybersecurity threats.
- Two major customers represented approximately 24% of sales in Q3 2023 and 23% in Q3 2022; for the nine-month periods, they represented approximately 23% and 22%, respectively.
- Lifeway is pursuing litigation against Ludmila and Edward Smolyansky. In August 2023, the court allowed an amended complaint and transferred the matter for consideration of an injunction motion and trial on a claim seeking a permanent injunction. Management said accrued legal matters were not material, while noting an adverse outcome could have a material effect.
- The company reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and effective disclosure controls as of September 30. Nine-month general and administrative expense included costs related to non-routine stockholder action. The prior endorsement agreement with a director and former chairperson had been terminated in September 2022; no related royalties were reported in 2023.
Important facts for investors to verify
- Whether higher branded kefir volumes and improved gross margins continue, particularly if milk, transport or other input costs change.
- Customer concentration and the contribution of drinkable kefir to total sales.
- Post-quarter revolver repayment, remaining term-loan schedule, interest costs and continued covenant compliance.
- Developments and potential financial effects of the Smolyansky litigation and non-routine stockholder matters.
- Tax-rate variability and the impact of incentive compensation and share-based awards on expenses and dilution.