Lifeway Foods, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in millions of dollars unless stated otherwise. Lifeway sells cultured dairy products, principally drinkable kefir, and reports as one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $38.140 | $29.553 | $105.730 | $88.091 |
| Gross profit / margin | $7.588 / 19.9% | $6.993 / 23.7% | $18.865 / 17.8% | $22.719 / 25.8% |
| Operating income / margin | $1.195 / 3.1% | $1.044 / 3.5% | $0.387 / 0.4% | $5.474 / 6.2% |
| Net income | $0.983 | $0.480 | $0.208 | $3.404 |
| Basic and diluted EPS | $0.06 | $0.03 | $0.01 | $0.22 |
| Operating cash flow | Not provided for Q3 alone | $3.639 | $5.855 |
- Q3 sales rose 29.1%; nine-month sales rose 20.0%. Management attributed growth chiefly to higher branded drinkable kefir volumes and 2022 price increases, with a smaller contribution from the GlenOaks Farms acquisition.
- Despite higher sales, gross margin fell in both comparisons. Management cited milk-cost inflation, freight and other input costs; operating income for the first nine months dropped to $0.387 million.
- Nine-month net income declined to $0.208 million from $3.404 million. The 2022 effective tax rate was (0.8)% for the nine-month period, compared with 35.2% in 2021; the Q3 rates were 11.7% and 52.3%, respectively.
Liquidity, cash flow and debt
- At September 30, cash was $8.933 million and current assets were $31.654 million, compared with current liabilities of $14.497 million. Working capital was approximately $17.2 million.
- Nine-month operating cash flow was $3.639 million, down from $5.855 million. Investing used $3.189 million, including $2.609 million for property and equipment; financing used $0.750 million. Cash decreased $0.300 million from year-end 2021.
- Debt included $2.777 million outstanding on the revolving credit facility and a $3.750 million term-loan balance before $0.025 million of unamortized financing costs. The revolver had $2.223 million available. Reported rates were 4.61% on the revolver and 4.94% on the term loan.
- The term loan matures in August 2026 and the revolver in June 2025. Lifeway reported compliance with its financial covenants at quarter-end.
Changes, outlook and risks
- Management expected continued pressure from milk and other input costs during Q4 2022; it gave no specific numerical sales or earnings guidance. It cautioned that pricing may lag cost increases or may not fully offset them.
- Management said it had maintained production capacity and had not experienced significant supply-chain or labor disruptions, but noted that pandemic-related demand could change as at-home consumption patterns normalize. Inflation, commodity pricing, customer and competitor actions, supply-chain disruption and regulation were identified as risks.
- Accounts receivable and inventory increased from December 2021 to $11.507 million and $9.192 million, respectively. The company attributed lower operating cash flow in part to lower cash earnings and working-capital changes.
- The 2021 comparative financial statements were restated for previously identified errors involving deferred tax liabilities and goodwill tied to a 2009 acquisition. The filing also says the internal-control material weakness disclosed previously remained under remediation, particularly for income-tax accounting; management nevertheless concluded disclosure controls were effective at September 30.
- Legal matters were described as arising in the ordinary course, with no material accruals; management said an adverse outcome could nevertheless have a material effect. Risk factors were reported as unchanged from the 2021 Form 10-K.
- Related-party items included termination of a director/former chair’s consulting agreement in January 2022 and termination of her product endorsement agreement in September, under which the company agreed to a $0.400 million lump-sum payment. On November 7, after quarter-end, Lifeway agreed to buy 850,340 shares from her for $4.70 per share, to be held as treasury shares; completion and terms should be checked in subsequent disclosures.
- The useful life of one brand-name intangible was changed from indefinite to 15 years effective January 1, 2022, increasing amortization. The filing estimates $0.540 million annual amortization for each of 2023–2026.
Important facts for investors to verify
- Whether sales growth and pricing can offset continued milk, freight, packaging and other input-cost pressure, and whether margins recover.
- Whether the ongoing internal-control remediation addresses the previously identified material weakness and whether tax reporting remains reliable.
- Subsequent disclosures on completion, funding and effects of the planned related-party share repurchase, as well as any associated governance or settlement developments.
- Future operating cash flow, capital spending, debt repayments and covenant compliance, especially if margins or working-capital needs deteriorate.
- The effects of the 2021 restatement and the accounting treatment of the related intangible assets; the 2021 comparative figures in this filing are identified as restated.