Lifeway Foods, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited; dollar figures below are in millions unless otherwise noted. Lifeway makes cultured dairy products, led by drinkable kefir.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $39.230 | $33.491 | $77.134 | $67.590 |
| Gross profit | $11.280 | $5.697 | $19.506 | $11.277 |
| Gross margin | 28.7% | 17.0% | 25.3% | 16.7% |
| Operating income (loss) | $4.766 | $0.241 | $6.203 | $(0.808) |
| Net income (loss) | $3.156 | $0.120 | $3.986 | $(0.775) |
| Diluted EPS | $0.21 | $0.01 | $0.26 | $(0.05) |
- Q2 sales increased 17.1%; first-half sales rose 14.1%. Management attributed growth mainly to higher volumes of branded drinkable kefir, with additional contribution from late-2022 price increases.
- Drinkable kefir excluding ProBugs generated 80% of Q2 sales and 79% of first-half sales.
- For the six months, operating cash flow was $5.455, compared with cash used of $0.529 a year earlier. Investing cash outflow was $1.950, including $1.990 of property and equipment purchases; financing cash outflow was $0.500 for term-loan principal payments. Cash increased $3.005 to $7.449.
- At June 30, current assets were $29.657 and current liabilities were $12.133. Total assets were $72.164; stockholders’ equity was $52.172.
- Debt included a $3.250 term loan before deferred financing costs ($3.230 net carrying value) and $2.777 drawn on the revolving facility. The revolver had $2.223 available. Rates at June 30 were 7.10% on the term loan and 7.14% on the revolver.
Material changes versus comparable periods
- Profitability improved substantially as sales grew and gross margin expanded. Management cited higher branded-product volumes, favorable milk pricing, prior price increases and lower transportation costs.
- First-half selling expense rose $0.406, partly due to compensation, while the termination of a related-party endorsement agreement reduced royalty expense. First-half general and administrative expense increased $0.812, primarily due to incentive compensation and expenses related to non-routine stockholder action.
- Interest expense increased to $0.213 for the first half from $0.094. The effective tax rate for the first half was 33.8%, versus 14.5%; management noted that nondeductible items and discrete adjustments affect the rate.
Outlook, risks and notable items
- Management expects inflationary pressures to persist through 2023, but at lower levels than in 2022. It reported moderation and declines in some input costs, including milk, and expects prior price increases to help offset costs. The company reported full production and no significant supply-chain or labor disruptions, with no near-term manufacturing or staffing disruptions anticipated.
- Management believes operating cash flow, cash and available borrowing capacity will be sufficient for working capital, capital needs and growth initiatives. Capital spending is planned for growth, cost reduction and facility improvements. No specific revenue or earnings guidance was provided.
- The company was in compliance with its credit covenants at June 30. Covenants include a minimum fixed-charge coverage ratio of 1.25 to 1.00 and minimum working capital of $11.25 million. The revolver matures June 30, 2025; the term loan matures August 2026. Borrowings transitioned from LIBOR to SOFR plus 2.07% after June 30, 2023.
- Risks cited include commodity-price changes, competitor and customer pricing actions, strategy execution, regulation, and supply-chain or manufacturing disruptions, including cybersecurity threats. Two major customers together represented approximately 23% of first-half sales.
- Lifeway reported ordinary-course legal matters and stated that related accruals were not material and management did not expect a material adverse effect; an adverse outcome could nevertheless be material. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and margin gains persist as milk and other input costs, pricing, and product volumes change.
- Whether higher incentive compensation and non-routine stockholder-related costs continue to affect operating expenses.
- Cash generation, planned capital expenditures, debt repayment, and continued compliance with credit covenants.
- Customer concentration and the effect of any changes in purchasing or pricing by major customers.
- Developments in disclosed legal matters and any resulting financial exposure.