Lifeway Foods, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Lifeway manufactures cultured dairy products, led by drinkable kefir, and reports one operating segment. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $26.039 | $22.729 | $76.441 | $70.497 |
| Gross profit / margin | $7.577 / 29.1% | $5.173 / 22.8% | $20.502 / 26.8% | $17.039 / 24.2% |
| Operating income (loss) / margin | $2.617 / 10.1% | $(0.255) / (1.1%) | $4.293 / 5.6% | $(0.722) / (1.0%) |
| Net income (loss) | $1.826 | $(0.072) | $2.952 | $(0.601) |
| Diluted EPS | $0.12 | $(0.00) | $0.19 | $(0.04) |
- Q3 sales rose 14.6%; nine-month sales rose 8.4%, primarily on higher branded drinkable kefir volumes. Lower cream revenue, reflecting lower butterfat market prices, partly offset growth.
- Management attributed improved gross margins mainly to favorable milk pricing and, secondarily, freight costs. Nine-month benefit was partly offset by COVID-related hourly wage premiums.
- Selling expenses fell 21.0% in Q3 and 12.9% year to date, largely because trade shows and other marketing events were postponed and in-store demonstrations were reduced. Nine-month G&A declined 4.6%, including lower compensation and incentive expense, partly offset by higher professional fees.
- Advertising expense was $1.7 million for the nine months, versus $2.65 million in 2019. The nine-month effective tax rate was 29.3%, versus 8.8%; the 2020 rate included a $0.245 million benefit from CARES Act net operating loss carryback provisions.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $5.348 million, versus $4.953 million in 2019. Investing used $1.163 million, including $1.168 million of capital expenditures; financing used $0.405 million, primarily treasury-stock purchases.
- Cash increased $3.780 million during the nine months to $7.616 million at September 30, 2020. Current assets were $23.775 million and current liabilities $9.102 million; working capital was approximately $14.673 million.
- Net property and equipment was $21.082 million. Total liabilities were $13.390 million and stockholders’ equity was $46.506 million.
- Revolving-credit borrowings were $2.763 million, with $2.223 million available for future borrowing. The reported interest rate was 2.41%; the facility is secured by substantially all company assets.
- A September 2020 credit amendment extended the revolving loan termination date to June 30, 2025, removed monthly borrowing-base reporting and eliminated tiered interest pricing. It added a quarterly minimum working-capital covenant of $11.25 million beginning with the quarter ending December 31, 2020. The 1.25-to-1.00 minimum fixed-charge coverage covenant remained; Lifeway reported compliance with applicable covenants at quarter-end.
Outlook, risks and notable items
- No numerical financial guidance was provided. Management said COVID-19 had not materially affected operations, citing increased retail orders as consumers bought more food for home and the company’s advance supply and staffing planning. It reported full production capacity and no anticipated near-term manufacturing or staffing disruption, while continuing to monitor liquidity and discretionary spending.
- Management identified risks including COVID-19 effects on customers, employees and suppliers; supply-chain, manufacturing or distribution disruption; competition and customer decisions; commodity prices; and regulation. Results remain subject to uncertainty, and forward-looking statements are not guarantees.
- Two major customers represented approximately 21% of nine-month sales, compared with 22% in 2019. The filing does not identify them in the provided text.
- Lifeway disclosed ordinary-course legal matters, but reported no material accruals and said it could not reasonably estimate possible losses or outcomes. Management did not expect the matters to have a material adverse effect, while noting an adverse outcome could do so.
- Related-party payments included $0.750 million of consulting fees and $0.450 million of product royalties to the board chair for the nine months. The company repurchased 178,417 shares for $0.405 million during the period and reported no remaining authorization under the amended repurchase plan.
Investor verification priorities
- Whether pandemic-related retail demand and favorable milk-cost conditions continued after September 30, 2020, and how they affected sales and gross margins.
- The credit agreement’s borrowing availability, new minimum working-capital covenant, continuing fixed-charge coverage requirement, and covenant headroom.
- Customer concentration and the extent to which sales growth depended on a small number of customers or drinkable kefir.
- The nature and subsequent developments of legal contingencies, and the basis for management’s assessment that losses were not estimable.
- Board-chair consulting and royalty arrangements, including their ongoing terms and governance oversight.