Lifeway Foods, Inc. — Q3 2013 Form 10-Q
Business and period: The company produces dairy products, led by Kefir, and related food products. This filing covers the quarter and nine months ended September 30, 2013; financial statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $23.79 million | $20.62 million | $71.26 million | $60.57 million |
| Gross profit | $6.87 million | $6.87 million | $22.81 million | $20.58 million |
| Operating income | $2.20 million | $2.08 million | $8.42 million | $7.08 million |
| Net income | $1.69 million | $1.40 million | $5.46 million | $4.55 million |
| Diluted EPS | $0.10 | $0.09 | $0.33 | $0.28 |
- Q3 net sales rose about 15%; nine-month net sales rose about 18%. Management attributed growth principally to Kefir, ProBugs Organic Kefir for kids, and BioKefir.
- Gross margin was approximately 28.9% in Q3 versus 33.3% in Q3 2012, and 32.0% for nine months versus 34.0%. Management cited milk costs up 35% in Q3 and about 25% for the nine-month period.
- Operating margin was approximately 9.3% in Q3 versus 10.1%; for nine months it was approximately 11.8% versus 11.7%. Nine-month operating expenses increased, including general and administrative expense up about 20% to $5.57 million.
- Cash from operations was $3.62 million for nine months, compared with $6.09 million a year earlier. Working-capital uses included increases in accounts receivable and inventory; the filing’s MD&A attributes the operating cash decline primarily to inventory growth.
- Investing activities used $7.93 million, principally reflecting $8.21 million of property and equipment purchases. Financing activities provided $3.26 million, including $4.98 million of net debt proceeds, partly offset by dividends and debt repayments.
Financial position and material changes
- At September 30, 2013, current assets were $24.55 million and current liabilities $8.92 million; working capital was approximately $15.63 million. Cash and equivalents were $1.24 million, investments $2.51 million, and certificates of deposit $0.12 million.
- Total assets were $64.47 million, up from $54.51 million at September 30, 2012, largely reflecting property and equipment of $21.64 million, up $6.88 million year over year.
- Total notes payable were $10.09 million, including $0.88 million current maturities, compared with $5.68 million a year earlier. A $5 million Private Bank borrowing was added in 2013; the company also refinanced an existing note, extending its maturity to May 2018. Borrowings are secured by substantially all company assets and subject to minimum fixed-charge-ratio and tangible-net-worth thresholds.
- Equity was $43.41 million. The company paid dividends of $1.31 million, or $0.08 per share, during the nine-month period.
- Inventory was $8.38 million versus $5.57 million a year earlier. Two customers together represented approximately 35% of nine-month gross sales and 25% of receivables at September 30, 2013.
Outlook, risks and unusual items
- Management said it anticipates funding foreseeable liquidity requirements internally; no specific revenue or earnings guidance was provided.
- The Golden Guernsey Wisconsin facility investment contributed to the increase in property and equipment. The filing says the acquired assets cost approximately $7.4 million and none had been placed in service. In Q3, the company sold certain acquired assets for net proceeds of $537,500 and recorded an approximately $209,000 gain in other income.
- Milk-cost inflation is a significant margin pressure. Customer concentration and the increase in working-capital investment are additional risks to monitor.
- Disclosure controls were deemed ineffective at the reasonable-assurance level as of September 30, 2013 due to a material weakness involving classification of costs and expenses. The company reported remediation steps, including stronger ledger monitoring and expense coding review. Comparative 2012 statements were restated to move production costs from general and administrative expense to cost of goods sold; net income and cash flows were unchanged.
- The company disclosed ordinary-course litigation that management did not expect to have a material adverse effect; it reported no material pending legal proceedings in Part II. No formal risk factors were provided in this filing.
Investor verification points
- Reconcile the cash-flow disclosures: the financial statements report operating cash flow of $3.62 million and ending cash of $1.24 million, while MD&A cites $3.60 million and $1.22 million, respectively, and gives a different net cash decrease. The filing text does not explain these discrepancies.
- Review the loan documents and confirm covenant headroom, collateral terms, and the status and availability of the $50 million line of credit, which was reported undrawn and maturing May 31, 2014.
- Track whether milk costs continue to pressure gross margins and whether sales growth translates into improved profitability and operating cash flow.
- Assess inventory and receivables growth, customer concentration, and the timing and use of the Golden Guernsey assets.
- Monitor whether the disclosed remediation resolves the material weakness and whether subsequent reporting avoids further classification errors or restatements.